Small 401(k) Plan Contribution, Eligibility Practices Profiled

A new survey of nearly 4,000 401(k) plans sheds some light on current plan design trends in the small-plan market.

The survey of 3,975 small business 401(k) plans focused on common practices in two plan design areas: contributions and eligibility requirements. It was conducted by Employee Fiduciary, a TPA and recordkeeper based in Mobile, AL, and summarized by Eric Droblyen, CPC, QPA, in a post on the firm’s blog. Also reported are changes in the data in the 3 years since the firm conducted a previous version of the same survey in 2016.

Contributions

Key findings of the survey include:

• 69% of plans use a safe harbor 401(k) plan design to avoid annual ADP/ACP and top heavy testing, up from 68% in 2016.
• 10% of plans automatically enroll employees who fail to make an affirmative enrollment election, up from 9% in 2016.
• 71% of plans permit after-tax Roth 401(k) contributions, up from 66% in 2016.
• 85% of plans permit employer profit sharing contributions, down from 86% in 2016.

The survey also found that the most popular type of profit sharing contribution is new comparability combined with a safe harbor nonelective contribution. “This combination is not surprising when you consider safe harbor nonelective contributions help new comparability contributions pass annual nondiscrimination testing,” Droblyen points out.

Eligibility

Key findings include:

• The two most popular service requirements were 1 year (used by 50%) and none at all (used by 22%). These findings “are very similar to our 2016 findings,” Droblyen notes.
• An eligibility requirement of 1 year-of service is most commonly combined with semi-annual entry dates and an hours-of-service crediting method – the most restrictive combination allowed under the regulations.
• 68% of plans with no service requirement allow employees to enroll immediately – in other words, as of the date of hire.
• Most plans that allow employees with less than 1 year of service to enroll use the elapsed time method for determining length of service (i.e., duration of employment), rather than a “counting hours” method (i.e., employees must work at least a certain number of hours over the course of a specified period).