Accounting Best Practices, Fifth Edition

11–15. Grant Employees Immediate 401(k) Eligibility

The most common way to enroll employees into a company’s 401(k) pension plan is to make them wait either 90 days or a year from the date of hire. This calls for the maintenance of a list of dates for newly hired employees that must be watched to ascertain when someone becomes available for this benefit. Then they must be contacted and scheduled for a short lecture about how the plan works and how to invest in it. Then they complete paperwork to enroll, which is forwarded to the payroll department so that deductions can be made from their paychecks for advancement to the 401(k) plan administrator. All of the steps can more easily be compressed into the hiring process, as was just noted in the “Automate 401(k) Plan Enrollment” section in this chapter. However, the issue can be taken one step further not only by completing all of the paperwork at the time of hire, but also by actually allowing immediate participation in the plan at the time of hire. This represents less a matter of improved efficiency than of giving new employees a fine new benefit, for they can begin investing funds at once, which may lead to a reduced level of employee turnover.

The main problem is that new employees can impact a company’s ability to pass pension plan nondiscrimination tests, especially if the new hires are at low pay scales. If these new employees do not invest a reasonable proportion of their salaries in the 401(k) plan, this can force highly ...