Automatic Enrollment Options
By Tyler Monda, CIP, CHSP
I have a client looking to add an automatic enrollment feature to their 401(k) plan. What options do they have?
Automatic enrollment is a great way to encourage employees to participate in a 401(k) plan. It allows them to automatically start saving for their retirement. There are three different ‘flavors’ of automatic enrollment, and while the general concept is similar among all three, they each contain their own nuances.
Automatic Contribution Arrangement (ACA)
This is a “bare bones” auto-enrollment option that can be added to a 401(k) plan at any point during the plan year. There is no minimum, nor maximum, starting deferral percentage and automatic participant deferral increases are optional. The employee may elect to contribute at a different rate or to opt out altogether. Employer contributions are also optional under this arrangement, and regular plan vesting requirements apply.
Eligible Automatic Contribution Arrangement (EACA)
EACA is similar to ACA. It is more of a “middle-of-the-road” option in relation to complexity. In addition to the ACA features, EACA includes the optional return of employee automatic contributions, known as “permissible withdrawals.” This feature allows automatically-enrolled participants to withdraw their contributions and earnings within a certain timeframe following their first contribution, should they decide they do not want to participate. The employer can choose whether to allow for permissible withdrawals, and specify in the plan document the number of days that participants have for requesting withdrawals, so long as it is no sooner than 30 and no later than 90 days following the initial contribution.
The EACA feature may only be added on the first day of a plan year, although an exception may apply for brand new plans. When added to a plan, if the employer chooses to have the EACA apply to all currently eligible employees, rather than just newly eligible employees, any actual deferral percentage (ADP) or actual contribution percentage (ACP) refunds that the plan has yet to process will have an extended deadline of six months after the plan’s year-end.
Qualified Automatic Contribution Arrangement (QACA)
QACA is a “top-of-the-line” automatic enrollment option. Similar to EACA, QACA allows the employer to offer permissible withdrawals and only can be added the first day of a plan year, although an exception may apply for brand new plans. QACA carries a minimum automatic deferral percentage of three percent. Automatic deferral increases are required until the deferral percentage reaches six percent or higher, if elected in the document. The maximum deferral percentage that can be withheld pursuant to a QACA is 10 percent.
A QACA can be deemed to satisfy the requirements for ADP/ACP and top-heavy compliance testing, as long as a mandatory employer contribution (basic match, enhanced match, or non-elective) is provided that does not take longer than two years to fully vest.
All three options require participant notices that must be provided at least 30 days before an employee becomes eligible, and annually between 30 and 90 days before the beginning of the plan year. The client will want to consider the features of each arrangement to determine which option best aligns with the goals for their plan and participants.
What happens if my client mistakenly fails to enroll an employee in the plan’s automatic enrollment feature?
The IRS considers this an excluded participant failure, and it is a relatively common error among 401(k) plans. The employer may correct this through the IRS’ Employee Plans Compliance Resolution System (EPCRS), by making a qualified non-elective contribution (QNEC) to the plan on behalf of the affected employee. This corrective contribution, which needs to be adjusted for earnings, is equal to 50 percent of the affected employee’s missed deferral opportunity, which is the amount of deferrals that would have been withheld had the employee been correctly auto-enrolled. Additionally, the employer needs to provide 100 percent of any employer contribution that the employee missed due to the failure, adjusted for earnings.
The IRS allows employers to use reduced QNEC percentages of 25 percent or even zero percent, if the plan meets certain requirements. An added benefit of a plan having an automatic enrollment feature is that the timeframes specified to qualify for a reduced QNEC percentage extend beyond those for plans without automatic enrollment.
To qualify for a zero percent QNEC,
the excluded employee must be employed at the time of correction;
the failure does not extend beyond the earlier of 9.5 months after the end of the plan year that the failure began, or the month following the month that the affected employee notified the employer of the failure; and
the employer provides a notice of missed deferrals to the affected employee within 45 days of the day correct deferrals for that employee begin.
To qualify for a 25 percent QNEC,
the excluded employee must be employed at the time of correction;
the failure extends longer than 9.5 months after the plan year that the failure began, but does not extend beyond the earlier of the end of the second plan year after the failure began, or the month following the month that the affected employee notified the employer of the failure; and
the employer provides a notice of missed deferrals to the affected employee within 45 days of the day correct deferrals for that employee begin.
