A friend of me who does W2 contracting called me say everything looks very good at this new job assignment he wants with a new contracting company, but they have a 1 year waiting period to be eligible to participate in the 401(k) program offered by the company.
What is this 1995? I never heard of anyone these days in making a W2 contractor wait a year to be able to use the 401(k). It isn’t like the company is going to do matching anyway. Most make new employees wait 1-3 months.
After having been involved in a number of 401(k) plans from different employers over the years, this waiting period is determined by the company. So can this be negotiated? Has anyone been successful in getting the waiting period on a 401(k) changed or waived?
I’m not an employment law expert, but my understanding is that employers REALLY don’t want to have exceptions to their benefit plans because they might end up with an EEOC, ADA, or EDEA complain (cite, other cite).
That said, sounds like your friend is applying to work at a pretty shitty company if they make you wait a year to participate and don’t even offer matching. That screams to me “We plan on burning our employees out within a year so we don’t have to worry about a retirement plan except for the execs”.
If we were talking about so-called permanent employment jobs, I would agree with you. However, this is through a contractor house (aka temporary work).
Contract houses don’t do matching on 401(k) plans for hourly employees. But they do pay time and half for overtime. Contract houses are essentially payroll companies. They find work for people, and bill the client until the client no longer has a need for them. In return, contract houses for IT work if you have the right experience offer high rates.
My friend said this is for a long term (1 year+) contract, so I could see them not wanting to bother with the paperwork for a 401(k) for a contractor for a 3 month assignment. But this long, seems strange.
There is a non-zero cost to adding you to the employers plan, even if the employer does not match your contributions. A company with a large amount of short-term employee turnover may wish to avoid these costs.
There are also requirements that a company demonstrate non-discrimination in plan participation (percentages of highly compensated employees vs other employees who participate) and it looks like possibly limiting the eligibility of non-highly-compensated employees who are unlikely to participate (those working less than a year, say) may allow a company to pass these requirements.
I am a senior manager in a company that requires 1 year of employment to be eligible in the 401(k) and I assure you we are not a shitty company. We are a small company and want people to be long-term employees, not job-hoppers who leave after a year. (We do not offer matching but we do make an annual contribution as a profit-sharing program, which can net out better than what some matching programs offer.)
Waiving the eligibility requirement is a non-starter.
A contracting business has a lot of turnover, depending on what their model is. This seems very reasonable to me.
edwardcoast, the description of your friend as a “W-2 contractor” is a little murky. Do you mean he is a W-2 employee of a company, and that company contracts him out to their clients?
A W-2 contractor is someone who works with a third-party (commonly referred to as a contract house, a temp agency, staffing firm, etc.). Huge companies like Microsoft, Google, IBM, etc., have W-2 contractors working there.
Even in contracting it is highly usual to expect an employee who you are offering a long-term contract (1 year plus) to wait 1 year to be eligible for a 401(k). Every company I’ve heard of that does this makes employees wait only 1-3 months (start of new quarter) to enroll, not an entire year. Some can start immediately. Because if they all made employees wait a year, a contractor would not be able to save for retirement through a 401(k).
I talked to him again today, and he agreed if the company can’t allow him to start the 401(k) without the silly one year wait, to pass on the offer and go through a more modern contract house. After all, if they want to be competitive to get the better people they have to be willing to do what is standard in the industry for the area.
Very familiar with the arrangement, we use them too. I just never heard them called “W-2 contractors.” We just call them contractors. We never see a W-2 for them. Some might be on 1099s. We don’t care.
Only for a year.
Not much point in arguing it, though. Not having a 401(k) doesn’t mean you can’t save for retirement, but if that item is really a show-stopper for your friend, then, yeah, look for a better deal elsewhere. However, I’m sure there are other factors at play that could make one company or another look better over a longer haul compared to one year. Just look at the whole package.
I seem to recall that some 401(k) plans will allow a new employee to roll an existing 401(k) balance into the new employer’s plan and start contributing from day one even if other employees have to wait to participate in the plan. It’s essentially a recruiting benefit for senior career switchers that doesn’t flood the plan with participants who will leave in three months with tiny balances or who won’t contribute at all and thus will skew the “top heavy” formula that might trigger the employer to have to make extra contributions on behalf of low-level employees. The 401(k) servicer likes it because instead of starting a new account for a new employee contributing $12 per week they get a meaningful amount of money upfront from someone who is trying hard to maximize the amount in his account.
In order for this to work, your friend needs a 401(k) balance somewhere to roll over. He should ask HR if this is possible. He probably won’t be eligible for any match the company offers to other employees.
The IRA contribution limits are lower and there is no reason you can’t contribute to both. If you are trying to save the maximum in tax deferred accounts, your idea doesn’t help.
You say “only for a year”, but if all contract houses did this, there would be no 401(k) benefit for the employees, because a lot of assignments don’t last a year.
The IRA limits won’t do for highly compensated W2 contractors because it is too small, a 401(k) is needed. With a 401(k) you can do up to $18K a year and $24K a year for those over 50.
With an IRA you can only put in $5K a year or $6500 a year if over the age of 50 as a catch-up. With a 401(k) you can do $18K a year or $24K a year if over the age of 50.
I know this might sound like an adequate amount for people that an IRA should do, but if a W2 contractor is making gross $170K a year (or more), saving only $5K a year in retirement isn’t a good retirement plan, because that’s only about 3% a year of the gross.
The better contract houses have a 401(k) for the W2 contractors and usually it starts along with the other benefits such as the health insurance group plans.
You have a good point. Someone who has a 401(k) from a previous employer who is willing to roll it over, it would be silly to expect them wait a year as well. It sounds like the Company itself makes the decisions so they can get approval from someone there in management to do this.
I also know from my personal experience, that they encourage employees to contribute to 401(k) plans, because if not enough do this, they end up returning some of the contributions to employees. This is why some companies automatically set-up the 401(k) plans to do 3%, not because they care so much about the employee’s retirement, but they care about the more highly compensated employees not being able to do the full contributions.
The company made the decision to offer that rollover option when they set up the plan. Either they can do it for every new employee with a 401(k) or none of them. It is highly unlikely that they would amend their plan just for his benefit. If their 401(k) plan doesn’t allow it now, the company would probably rather pay your friend an extra $10,000 or $20,000 per year than change the 401(k) just for him. He should still ask if this is something they do. It’s not a common plan feature but at least some plans used to offer it.
You’re saying that they get fired after their first assignment is up? A good shop will not drop an employee after one engagement but be working to get the next assignment in the pipeline.
No. This is contracting, it is temporary work. This is not work from a consulting company where they bid on a project and move the employee around to different clients. Clients have projects, they last 6 months, 12 months or whatever the time period is, and that’s the end of the need for that person. And this involves changing contracting companies for the next gig. The contract house doesn’t drop the employee, the client ends the assignment. Either that task has been completed, or they were hiring a contractor until HR would approve a permanent replacement for the head count. Even coming back to work for the same client again doesn’t always involve the same contract house. Not all companies get on the approved vendor list and some get dropped, while others are favored.