I don’t like to blame, but sometimes it’s easy to see who might be at fault. The worst part is that I've seen the same mistake re-surface yet again!

A few years ago, a certain vendor ended up selling a pre-packaged, pre-designed 401(k) plan to several companies. It seems, perhaps, that these companies had the same ambitious financial advisor or broker.  Thus, they were related, in one way, in that the shared financial advisor/broker had each of them in its same sales territory and, in another way, in that each of the companies manufactured a component widget of an even larger widget with people throughout the United States purchasing such larger widget.  The companies were not necessarily “related employers” in the tax or ERISA sense (thus, not related through parent-subsidiary, brother-sister, or affiliated service).  

The companies each employed many US citizens.   Each company also drew from and employed foreign citizens from a specific foreign country.  These individuals were indeed foreign nationals, non-resident aliens earning US source income.  The vendor and the company's financial advisor furnished the standard retirement plan materials:   the plan document, summary plan description, and adoption agreement.  In an attempt to be helpful, the vendor provided a “Summary of Plan Features.” While the Internal Revenue Code and ERISA each require a variety of documents, a “Summary of Plan Features” is not among those.  

Here’s what the “Summary of Plan Features” indicated verbatim regarding the employees excluded under the plan that the financial advisor had sold:

Employees Excluded:

- Collectively bargained employees 

- Non-resident aliens

The collectively bargained employees are not relevant to this blog post, but what is germane here is that the Summary of Plan Features provided that the client’s plan exclude non-resident aliens.  Seems pretty clear so far, right?!

Note what the Adoption Agreement, in part, indicated (with the design choices demarcated with an “X”):



(a)  Covered employees include:

[X] All employees of adopting employer

(b)   Covered employees exclude:

[X] Collectively-bargained employees

[X] Non-resident aliens who do not have United States source income

(Bold and underline mine.)  The Summary of Plan Features says to exclude “non-resident aliens.”  In contrast, the Adoption Agreement says that only “non-resident aliens who do not have United States source income” are to be excluded. What is HR personnel to do with such confusing and contradicting language about non-resident aliens?!  

Clearly, the use of the terms “exclude,” “non”, “do not” and the double, triple, quadruple negatives alone were confusing. This is where HR’s administration of the plan got dicey, and the result was obviously non-compliance under ERISA rules:  HR chose to exclude the non-resident aliens, relying on the purportedly helpful Summary of Features.  I had to draw a Venn diagram to figure out just which employees the plan could include and which it could permissibly exclude.  

In sum, HR failed to include those non-resident aliens who had had US source income, and the cost to correct the ERISA failure was expensive and took about two years to craft:

- In addition, the plan had auto enrollment, so what would have been the employees’ own money through their deferrals became the company’s required corrective contribution to rectify the error;

- The plan also had a required match owed to all those excluded non-resident aliens with US source income on the corrective contribution the employer had to make; and

- The company had to pay earnings on the corrective contribution and the match amounts for the years when the non-resident aliens with US source income were improperly excluded.

Moreover, the company was active in M&A, buying other businesses.  Those businesses also had non-resident aliens with US source income.  The acquiring company’s prototype document provided that employees in an acquisition were immediately eligible for participation, so the target's set of non-resident aliens with US source income were also excluded from the time of acquisition, on top of the buying company’s own impermissibly excluded non-resident aliens with US source income.  

In short, if the vendor, plan advisor, and HR had read through the plan materials that the company first executed; if they had found the inconsistent language regarding non-resident aliens; if they understood the reference to “US source income”; if they had understood the demographics of the company; if HR had taken a moment more to understand which employees were included and who were excluded; if HR had taken the time to get clarification on an obvious inconsistency –- perhaps there would not have been the waste of time and energy of the company, HR, and the third party administrator.   

Companies are loathe to seek legal counsel when someone is selling a 401(k) plan document to them.  Nonetheless, just a little ERISA guidance early and upfront during the plan design stage (during the initial sales process with the financial advisor/broker!) would have spared HR the headaches much later in finally understanding how the plan terms operated and would have saved on all the money that had to be spent (under IRS rules) to make plan participants whole from the mistakes in operation.  Oops!

The irony of it all is that this plan document –- likely in its same form with an accompanying “helpful” Summary of Features –still exists out there.  I know for certain, as I just landed another client with the exact auto enrollment and non-resident alien issues, once again.  Yet another "oops."