A qualified automatic enrollment feature ( as opposed to automatic enrollment- see Q14) is a plan design strategy that can apply to 401(k), 403(b) or governmental 457(b) plans, whereby elective contributions are automatically made to the plan at a specified rate unless the employee elects not to make contributions or to make contributions at a different rate.
A 401(k) or 403(b) plan that contains a qualified automatic enrollment feature is treated as satisfying nondiscrimination requirements related to the actual deferral percentage (ADP) and the actual contribution percentage (ACP) tests for deferral and matching contributions respectively. In addition, a plan consisting solely of contributions made pursuant to a qualified automatic enrollment feature is not subject to top-heavy rules. Employees who meet the plan's eligibility requirements are eligible to start contributing to the plan. The employer will notify these eligible employees and provide them with enrollment information. If the eligible employee does not respond, the employer will automatically start withholding a specific percentage of compensation from their salary, and will deposit the dollars into the plan on their behalf. These contributions will continue until the employee notifies the employer to increase, decrease, or cease the contributions all together.
Yes, a 90-day period is available for participants to withdraw their contributions penalty free when contributed under the automatic enrollment feature. A distribution of such an amount is generally treated as a payment of compensation, rather than as a contribution to and then a distribution from the plan. Dowlnoad Auto Enrollment 90-Day Cancellation Distribution Form
401(k), 403(b) and governmental 457(b) plans may utilize automatic enrollment.
The qualified automatic enrollment feature as outlined in the Pension Protection Act of 2006 (PPA-06) can apply to plan years beginning after December 31, 2007.
No, passage of this bill pre-empts state law restrictions for automatic enrollment as long as certain participant notification requirements are met. The pre-emption of conflicting state regulations is effective on August 17, 2006.
No, a plan does not have to apply the automatic enrollment feature to an employee who was eligible to participate in the plan or had an election in place for employee deferral contributions on or before the amendment adopting the automatic enrollment feature.
In order for an automatic enrollment feature to qualify for the safe harbor, the plan must provide for
Yes, employers must give eligible employees and participants an annual notice prior the beginning of the plan year that explains the automatic enrollment feature; again when they become a participant. The eligible employee must be given a reasonable period of time after receipt of the notice and before the first elective contribution is to be made to make an election with respect to contributions and investments; otherwise the sponsor can default the investment into a balanced portfolio or a managed account.
An employee's automatic deferral contributions cannot exceed 10 percent, and must be at least three percent during the initial plan year, increasing to four percent during the second plan year, increasing to five percent during the third plan year, and increasing to six percent during any subsequent plan years.
The plan must provide one of the following to each non-highly compensated employee:
- matching contributions do not exceed six percent of compensation,
- the rate of matching contribution does not increase as the rate of an employee's elective deferrals increases, and
- the rate of match for a highly compensated employee is no greater than the rate of match with respect to the same rate of deferral of a nonhighly compensated employee.
No, this is an additional option available to employers.
Yes, employer contributions must be 100 percent vested after no more than two years of service. This vesting rule is different than the one that applies to 401(k) safe harbor plans, where employer safe harbor contributions must be 100 percent vested.
No, a plan may still offer automatic enrollment if the employer meets participant notification requirements and allows participants to change their elections. A nonsafe harbor automatic enrollment arrangement does not require employer contributions nor does it require accelerated vesting. However, the plan will be subject to ADP, ACP and top-heavy testing requirements.