Many employers that participate in 401(k) plans do a very good job at keeping paperwork for participants who enroll in the plan. Where deficiencies occur is when the participant does not wish to participate in the plan but does not provide any additional paperwork showing they have declined enrollment. It is important that the employer keep documentation of the participant’s wishes to not participate in the plan.
While this control is often overlooked by employers who offer 401(k) plans to their employees, it is an important control to mitigate additional risk taken on by the employer. For example, a participant who has turned in an election form wishing to participate, might not have had contributions withheld from their compensation because of mistakes such as the paper getting lost in transit to the correct person who will make sure the participant is signed up. With no paperwork in the file stating there was or was not an election made, it might just be assumed that the participant did not wish to participate and has declined enrollment by not turning in a form. The participant can potentially come back and order the company to pay for the missed deductions plus any interest that would have been made on those contributions. Rev. Proc. 2008-50 provides guidance on what is required of the employer to do in such cases. For example, in the case discussed previously, an employer would be required to make the employee “whole” by contributing an amount equal to 50% of the employee’s missed deferrals that would have been made if the employee had been timely included in the plan. With an adequate control in place, this situation could have been avoided since as soon as it was noted that there was no paperwork in the file regarding whether the participant wished to participate or not they can follow up with the employee and the situation can be corrected.
As companies review their control procedures, this is one control that is both simple to execute and highly effective in protecting the plan from large amounts of risk. A best practice related to 401(k) enrollment forms is to have an option for the participant to check if they do not wish to participate in the plan. This allows the plan administrator to simply require, as one of their controls, that every participant who is eligible to return the form indicating their participation election. If declining enrollment is not an option on the election form, simply have the employee sign and date a form that says they do not wish to participate and include the information in the employee’s personnel file.