Question

What happens to your company match if you decline to sign up for a 401k?

When are your contributions fully vested?

Answer 1

A 401(k) is a retirement plan that many employers offer to help their employees save for retirement. The primary advantage of contributing to your 401(k) plan (instead of a normal investment account) is that the contributions you make are tax deferred. That means the money is taken directly from your paycheck before any income taxes are taken out of it, and it grows tax-free in your 401(k) plan.

You shouldn’t plan to withdraw funds from your 401(k) plan until you reach age 59 1/2. You can if you have to, but you’ll be forced to pay stiff penalties — or interest if you want to borrow against the value of your account. And you do eventually pay income taxes when you decide to withdraw funds from your 401(k). The tax benefit for most people comes because they are often taxed at a lower rate during retirement than they would have been when they made their 401(k) contributions. If everything else is equal, that means your nest egg will probably grow quite a bit bigger if you build it by investing in your 401(k) plan instead of a normal investment account.

A lot of workers like 401(k) plans because some of the setup is done for you and there aren’t as many tough decisions to make. If fact, over 60% of workers who aren’t offered a plan by their employer cite the ease of investing as their number one reason for wanting a plan. If your company already offers a plan through Guideline, here’s what it takes to get set up.

A 401k is a voluntary savings plan. A company may “auto-enroll” you- where the default is you join and deferrals start coming out of your check when you are hired. They cannot force you to continue to contribute if you opt out of the auto-enroll, although it’s always a good idea to save for retirement.

Even if the company was providing a match they cannot force you to actively contribute (though you always should take their match, it’s free money).

There are exceptions to this rule for other types of retirement plans, but NOT specifically for 401ks which are voluntary.

Employees decline to participate in 401(k)

You’ve got your process figured out – 401(k) benefit packages are given to employees the date they’re hired, or maybe it’s when they become eligible to participate or perhaps you rely on your TPA to communicate to the employee how to enroll when eligible. You collect all the necessary enrollment forms and get participating employees’ payroll deduction setup. Your job is done, right?

Not necessarily.

What about those employees who didn’t want to participate even though they were eligible? Did you collect the enrollment form with “I do NOT wish to participate…” checked and signed by the employee or any other form of support declining enrollment? If you didn’t, there are some risks you’re inviting in your front door that you could have easily avoided!

Understanding automatic enrollment in your 401(k) plan

For example, what if an employee insisted they had intended to participate and had not been properly informed they were eligible? Regardless of the truth in that statement, do you have proof otherwise? If you don’t, you as the employer will have to make a qualified non-elective contribution (QNEC) to the plan on behalf of that employee because of the “missed deferral opportunity.” This will be equal to 50% of the employee’s “missed deferral,” calculated by multiplying the actual deferral percentage for the year of exclusion for the employee’s group in the plan by the employee’s compensation for that year.

If you contribute a matching contribution, the fun doesn’t stop there! You are also required to make a corrective contribution for any matching contribution the employee would have received had they been deferring their missed deferrals.

Does any of this apply to you? Make sure you read the full guidance on this and other types of corrective procedures in Rev. Proc. 2013-12. Might any of this apply to you in the future?