Have you recently thought about adding auto-enrollment to your company’s 401(k) plan? If so, there are a few things to be aware of before deciding. First, what does auto-enrollment mean to the U.S. Department of Labor (DOL)? According to the DOL, automatic enrollment permits you to act on your employees’ behalf by helping them build their retirement savings with pre-tax employee contributions, and matching contributions from you, the employer. Automatic enrollment can take different forms:
A basic automatic enrollment 401(k) plan must state that employees will be automatically enrolled in the plan unless they elect otherwise and must specify the percentage of an employee’s wages that will be automatically deducted from each paycheck for contribution to the plan. The document must also explain that employees have the right to elect not to have salary deferrals withheld or to elect a different percentage to be withheld.
An eligible automatic contribution arrangement (EACA) is a type of automatic contribution arrangement that must uniformly apply the plan’s default percentage to all employees after providing them with a required notice. It may allow employees to withdraw automatic enrollment contributions, with earnings, by making a withdrawal election as required by the terms of the plan, no earlier than 30 days prior to or later than 90 days after the employee’s first automatic enrollment contribution was withheld from the employee’s wages. Employees are 100 percent vested in their automatic enrollment contributions
A qualified automatic contribution arrangement (QACA) is an automatic contribution arrangement with special “safe harbor” provisions that exempt a 401(k) plan from annual actual deferral percentage (ADP) and actual contribution percentage (ACP) nondiscrimination testing requirements. A QACA must specify a schedule of uniform minimum default percentages starting at three percent and gradually increasing with each year that an employee participates. Under a QACA, an employer must make a minimum of either:
This may not be a quick and easy question to answer, however, auto-enrollment is almost always a good idea for companies. Before adding an auto-enrollment feature, take the time to revisit the payroll processes and controls set in place to determine if any changes need to be made to ensure that the new feature is adequately implemented. At PriceKubecka, we get the chance to see multiple plans, so feel free to contact us today to see how auto-enrollment in a 401(k) might affect your organization.