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Focus on Compliance: Mid-Year Enrollments

Jun 27, 2018

Background


Internal Revenue Code Section 409A (“IRC 409A”) permits employees who first become eligible to participate in a non-qualified plan during the middle of the year to enroll within 30 days of initial eligibility. This rule may be beneficial to employees who are first hired in – or promoted to an eligible position during the middle of a tax year. However, care must be taken to ensure the rule is properly applied.

When is an Employee Considered Newly Eligible to Participate?

An employee is considered newly eligible to participate only if the employee meets one of the following conditions:
  • The employee has never before been eligible to defer on an elective basis to a non-qualified plan maintained by the company or any member of its controlled group
  • The employee was previously eligible to participate in an elective deferral plan but has been paid his or her entire account balance and was not eligible to participate when the last payment from the plan was made, or
  • The employee has not been eligible to actively participate in the plan for at least 24 months.
An employee who was previously given the opportunity to enroll in the plan but elected not to do so will not generally qualify as a newly eligible employee. Also, an employee who participates in a non-qualified plan of an affiliate, and who then transfers to employment with a related company, is not a newly eligible employee under the new company’s plan.

When Does the 30-Day Window Commence?

The 30-day window begins on the date the employee first becomes eligible to participate in the plan. Your plan document will identify the initial eligibility date. Some plans provide that an employee is automatically eligible on the date he is hired for or promoted into an eligible position. In such plans, the 30-day window begins on the date of hire or promotion. Other plans provide that eligibility does not begin until the employee has been officially notified of his or her eligibility for the plan. In those plans, the 30-day window begins on the date notice of eligibility is given to the employee.

What Amounts Can Be Deferred Under the 30-Day Rule by a Mid-Year Enrollee?

Only compensation for services performed after the election is submitted can be deferred. If under the terms of the plan the election does not take effect until the end of the 30-day window, then only compensation for services performed after the window closes can be deferred.

For compensation that is earned over a specified performance period (such as an annual bonus), a proration rule can be applied to ensure that this rule is satisfied. Under the proration rule, the election is applied to the result obtained when the total bonus is multiplied by a fraction equal to (i) the number of days remaining in the performance period after the election is made or takes effect, over (ii) the total number of days in the performance period. For example, an employee eligible for a $10,000 annual bonus earned over the calendar year who enrolls on March 15 may defer a maximum amount of $10,000 x 271/365, or $7,424. The enrollment form complies with the bonus proration rule if it limits deferrals to 70% of bonus compensation.

More Information

Newport Group employs a staff of attorneys who are available to discuss questions you may have regarding mid-year enrollments or your non- qualified deferred compensation plan generally. Our attorneys have a combined 60 years of experience in the insurance, banking, executive compensation and employee benefits industries. If you would like to discuss this or any topic with a member of our legal staff, please contact your Relationship Manager.




Newport Group, Inc. and its affiliated companies do not render tax or legal advice and the material contained within should not be interpreted or relied upon as constituting tax or legal advice. You should consult your tax or legal advisors with respect to specific tax or legal decisions.
 

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Newport Group, Inc. and its affiliates provide recordkeeping, plan administration, trust and custody, consulting, fiduciary consulting, insurance and brokerage services. Fiduciary consulting services are provided through Newport Group Securities, Inc., an SEC-registered investment adviser and FINRA-registered broker-dealer, and Newport Group Consulting, LLC, an SEC-registered investment adviser. Newport Group Securities, Inc. and Newport Group Consulting, LLC are affiliates of Newport Group, Inc. All securities transactions are provided through Newport Group Securities, Inc., in its role as broker-dealer. All fiduciary consulting services are provided through the registered investment advisers. When offering variable insurance products, Newport Group Securities, Inc. acts solely in its capacity as a broker-dealer. Trust and custody services provided by Newport Trust Company, a New Hampshire state chartered trust company and wholly owned subsidiary of Newport Group, Inc.