What happens if the employee contribution rates are significantly changing toward the end of the year?

If an employee's contribution rates are changing significantly toward the end of the year, the plan can impose limits on deferral election changes. This means that the plan may have provisions that restrict how often or how much employees can change their contribution percentages as the year comes to a close. Such limitations are often in place to help manage the plan’s compliance with contribution limits and ensure that the plan retains its qualified status under the Internal Revenue Code.

In most 401(k) plans, there are specific deadlines and rules surrounding contributions and elections, particularly toward the end of the plan year. Allowing unfettered changes could lead to complications regarding the annual contribution limits established by the IRS or disrupt the plan's operation.

Other options do not accurately reflect the implications of significant changes in employee contribution rates. For instance, contribution limits are not static and can be affected by various factors, so stating that nothing changes is inaccurate. The idea that automatic increases are allowed does not directly address the potential issues arising from significant changes late in the year. Lastly, the notion that employers will not notice the changes overlooks the importance of tracking contributions for compliance and plan management.