Welcome to the Brown Edwards Benefits Buzz, where we provide guidance on topics that may be impacting your employee benefit plans. I'm Brittany Quinn, an audit partner based out of our Roanoke, Virginia office. In this article, I want to address a critical issue that affects all types of benefit plans—from 401(k)s to ESOPs to health and welfare plans: eligibility and enrollment errors.
Recently, I had the opportunity to discuss this topic with Katelyn Tolliver, who works closely with employee benefit plans and sees firsthand how these issues arise and, more importantly, how they can be prevented. This is definitely a topic that plan sponsors can relate to.
What Are Eligibility and Enrollment Errors?
When we talk about eligibility and enrollment errors, we're really talking about situations where the plan is not operating in accordance with the plan document. Let me break this down into two categories:
Eligibility Errors happen when employees are allowed into the plan too early or too late based on the plan document provisions. Most plans have specific rules such as a minimum age, a service requirement, or a designated entry date such as the first of the month or the first of the quarter after eligibility is met.
Enrollment Errors, on the other hand, happen after someone is eligible. That's when deferral elections aren't implemented correctly, auto enrollment doesn't kick in, or payroll deductions don't start when they should.
It's important to emphasize that these are not intentional mistakes—they're process errors. Most errors happen because of a misunderstanding or misinterpretation, manual tracking, or breakdown of communication between HR, payroll, and service providers.
Common Eligibility Errors We See
These issues tend to sound theoretical until you see how easily they can happen. Here are some of the most common eligibility errors:
Incorrect Service Calculations
One common issue is incorrect service calculations. For example, a part-time employee might work a thousand hours over a two-year period, but the plan requires a thousand hours in a single 12-month period. If HR is tracking cumulative hours instead of plan-defined service hours, that employee may be enrolled too early. While this sounds generous—allowing them to benefit early—from a compliance standpoint, it's considered an error.
Applying the Wrong Entry Date
Another frequent issue is applying the wrong entry date. If a plan allows entry on the first of the month or quarter after eligibility, enrolling someone immediately or upon hire would be a violation of plan terms. For example, if plan entry is each quarter and the employee is hired on July 2nd—just one day after the start of the quarter—they must wait until October 1st to enter the plan.
Mistakes with Rehired Employees
We also see mistakes with rehired employees, where someone who may have already met those eligibility requirements during their previous employment is treated as a brand new employee and may be forced to re-qualify based on service requirements or entry dates. To avoid these types of errors, it's really important for plan sponsors to familiarize themselves with the break in service rules for their plan.
Common Enrollment Errors
These errors occur after the employee enters the plan. Here are the most frequent issues:
Auto Enrollment Failures
Auto enrollment is a big one here. We've seen situations where companies switch payroll systems and forget to reestablish those auto enrollment settings within those systems.
HR and Payroll Misalignment
Another common issue is HR and payroll misalignment, where HR is maintaining deferral forms and they don't provide those forms or communicate changes to payroll. So updates to deductions get missed.
Manual Deferral Errors
We also see manual/keying errors with the deferral elections where, for example, someone elects a 6% deferral and it is set up as a 3% deferral.
TPA Transition Issues
Another situation that we have seen occur quite frequently that impacts both enrollment and eligibility is when management decides to switch TPAs—switch service providers—and a new plan document is needed. Specifically, the error is a result of the new TPA misinterpreting or misunderstanding the plan provisions in that existing plan document.
Let's picture this real-life example: You change TPAs. You communicate to the TPA that you don't want to make any plan changes. And you, the plan sponsor, HR, and payroll, continue operating the plan as you had previously. Meanwhile, the TPA misinterpreted the provisions and in that written plan document that's now on file, it now doesn't align with how the plan is actually being administered. So now your plan is not operating in compliance with the plan document, even though there was no intent of changing the terms of eligibility or enrollment. The plan is now inadvertently violating the plan provisions. Unfortunately, this is a situation that we see quite often.
Why These Errors Matter
Let's discuss why these errors are so important to address:
1. Compliance Failures
From a compliance standpoint, these errors are considered failures. The IRS and the DOL expect plan sponsors to follow the plan document exactly as it's written.
2. Financial Consequences
There are financial consequences. Missed deferrals often require the employer to make corrective contributions plus earnings, and those costs can really add up.
3. Employee Impact
Employee trust is big. When someone realizes that they missed out on retirement savings because of an administrative error, it can really damage their confidence in the plan and the employer.
Prevention Strategies
The good news is these errors are preventable. Here are the controls that can make the biggest difference:
Clear Documentation and Understanding
Make sure your plan provisions are clearly documented and understood—not just by HR, but by payroll, finance, and anyone else involved in plan operations.
Automate Eligibility Tracking
Automate eligibility tracking whenever you can. Manual spreadsheets are one of the biggest risk factors that we see.
Regular Reconciliation
Regularly reconcile HR and payroll data. This step alone catches a lot of issues early.
Training
Let's not forget training. Training is huge. Anyone involved in the onboarding or payroll setup should clearly understand the plan provisions.
Evaluate Service Providers
Strong TPAs and strong record keepers often have alerts that flag missed enrollments before they become major problems.
What to Do If You Discover an Error
However, even with good controls, errors can happen. So what should you do if you discover one?
First, don't panic. The IRS has a formal correction program called EPCRS, and many errors can be self-corrected if they're caught early. Typically, corrections involve making up missed deferrals and employer contributions plus earnings. But don't forget, communication is key. Being transparent with affected employees goes a long way.
Recently, the Secure 2.0 Act expanded the ability for plan sponsors to self-correct—specifically these operational errors—without penalty, as long as they're not egregious or are related to any misuse of assets.
Final Thoughts
Eligibility and enrollment errors are common, but they're also one of the most preventable plan issues out there. With clear plan knowledge, strong controls, and regular reviews, plan sponsors can stay compliant and maintain employee trust.
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