It happens. An employee meets the 401(k) plan eligibility requirements, and the employer unintentionally does not offer enrollment at what should be the employee’s entry date. Roy Harmon in his Health Plan Law blog writes about a similar situation involving a group insurance benefit. The title of his post, “Instatement” In LTD Plan Appropriate Remedy Where Employer Fails To Enroll Employee, says it nicely. However, it required the employee having to sue the employer in order to receive benefits. The court, writes Mr. Harmon, opined that the employer acted as a fiduciary in its responsibility for benefit enrollment, and breached its fiduciary duty in the exercise of this responsibility.
Now having established that even an inadvertent mistake such as failure to a enroll an employee can be a serious matter, how does a 401(k) plan sponsor deal with a similar issue. “Serious”, by the way, in a 401(k) environment could mean the ultimate sanction, disqualification of the plan. Fortunately, it doesn’t usually require a law suit to make it right. The IRS has introduced a number of compliance programs starting in 1991 without them having to resort to disqualification.
These programs have been consolidated into the Employee Plans Compliance System (EPCRS), and IRS Revenue Procedure 2006-27, the most recent update of the EPCRS program, addresses the issue that started this discussion – an employer’s failure to offer 401(k) to an employee. The mechanics are beyond the scope of this discussion. The important consideration, however, is once found, employers should correct it as soon as possible. Out of sight, out of mind can have serious consequences.