Most 401(k) plans are run on a Calendar Year basis. Unless the plan is a Safe Harbor plan, the infamous ADP (average Actual Deferred Percentage) test is performed in the first couple of months following plan year end. So, most plan sponsors have recently been informed as to whether or not the test was passed for the prior year and some of your client's key people may have been forced to take refunds of some of their salary deferrals. They are never happy about that!
If you are not familiar with the annual ADP test, see our 401k) Primer: Click Here to Download the 401(k) Primer.
If the ADP test is not passed, then the Plan Sponsor will have to either return salary deferrals to some of their most important employees or make additional contributions for the Non-Highly Compensated Employees. Either way, the Plan Sponsor is not happy. Plan Sponsors are looking for solutions.
The possible solutions (and it may take several) may involve adding automatic enrollment, considering a small incentive match, re-energizing the employees by having some really effective enrollment meetings, explaining why now is the ideal time to get a lot of money into to the market at the earliest age possible so time is on their side. It might be even time to change the entire program to a new, more exciting vendor - reboot the plan by making some major changes.
Of course, the most obvious solution is to convert the plan into a Safe Harbor plan - see the Primer mentioned above to educate yourself on the Safe Harbor options. The Plan Sponsor will not be able to implement a Safe Harbor in the middle of a year, so that might only work for the next Plan Year.
As a CPA, if you client is complaining about the 401(k) Plan not working as they had hoped, encourage them to see a fresh new opinion about how their program is structured.
