Companies that sponsor 401(k) retirement plans will soon have one fewer reason--and perhaps excuse--to make new hires wait before letting them participate in these valuable tax-deferred savings plans.
Such waiting periods, many of which are as long as a year, can cost a worker hundreds of thousands of dollars over his or her lifetime.
In fact, by some estimates, a worker who changes jobs frequently could lose as much as half of his or her retirement savings potential over the course of a career if too many employers impose waiting periods.
Starting Jan. 1, though, two new laws will make it easier for companies to eliminate those waiting periods, and without jeopardizing their ability to pass mandatory IRS "discrimination" tests that are designed to make sure highly paid employees don't benefit too much more from the programs than other employees do.
Although companies cite other reasons for imposing waiting periods, employee benefits experts believe that the new laws will encourage companies to shorten the periods or eliminate them altogether.
"The new rules are going to simplify a lot of the complexities surrounding this issue," said Tom Burnham, vice president of human resources for Allergan Inc., the Irvine-based eye-care company that eliminated its waiting period more than two years ago.
Adds David Wray, president of the Profit Sharing/401(k) Council of America in Chicago: "This will really encourage companies to complete the move toward immediate eligibility. Immediate eligibility is going to become a common practice, and I think it will happen very fast."
The only problem: "Not a lot of companies are aware of the new laws," Wray said.
On their own, companies have been gradually shortening or eliminating waiting periods in recent years, as they've seen the 401(k) as a carrot of sorts to attract and retain skilled workers in a tight labor market.
In recent years, TRW, Ingram Micro and Jacobs Engineering Group have all shortened or eliminated waiting periods, citing, in part, competitive reasons.
Notes Alison Rossington, senior benefits assistant with Ingram Micro, a leading personal computer distributor: "It's just getting harder and harder to get people to leave their companies."
Be that as it may, 70% of the nation's 401(k) plan sponsors impose such restrictions. And the majority of them--58%--still make new workers wait a full year before allowing them to make pretax contributions to their company-sponsored retirement plans, according to a 1997 survey by New York-based Buck Consultants, a leading 401(k) consulting firm.
Among this group are some of Southern California's more prominent employers--such as Walt Disney Co., Hilton Hotels, Home Depot and Times Mirror, parent of the Los Angeles Times.
Many companies that impose waiting periods, especially those with high employee turnover rates, cite the administrative costs and other headaches associated with maintaining accounts for new employees, many of whom quit--or are fired--in their first year.
Notes Kathy Shepard, Hilton's vice president of corporate communications: "The nature of our biz is such that we have a lot of turnover. For a lot of our employees, this is their first job out of college. So it just makes sense to have a waiting period."
Besides, new employees, especially young ones and those who don't earn large salaries, tend not to contribute as much to their plans as do highly paid workers with experience--a critical point, companies have argued.
That's because all 401(k) plans must submit to a set of annual discrimination tests whose aim is to make sure that highly paid workers aren't disproportionately benefiting from a company's 401(k).
One of these tests, known as the ADP (or actual deferral percentage) test, states that within a company, highly paid workers--those who make $80,000 a year or more--can contribute only 2 percentage points more of their salaries than non-highly paid workers contribute of theirs. (The same cap applies to employees who own a 5% or larger stake in the company.)
So, the argument goes, if new hires are allowed in immediately and they don't contribute--or don't contribute much--they could affect how much more experienced, highly paid employees can contribute toward their 401(k) retirement accounts.
But the new laws--both part of the Small Business Job Protection Act of 1996--make it easier for companies to pass or get around the ADP tests.
One of the new laws states that companies can "satisfy" the ADP test by structuring their plan in a very specific and generous way, referred to as a "design-based safe harbor." This can include matching employee contributions dollar for dollar up to the first 3% of contributions, and then 50 cents on the dollar for the next 2 percentage points. Benefits consultants believe that few firms will go for this option, particularly if they already have a traditional "defined-benefit" pension plan as well.
The other law, however, should have a wider effect, benefits consultants say.