Explore Auto Enrollment in 401(k) Plans

Auto enrollment, or automatic contributions, continue to grow in popularity as 401(k) plan sponsors look for ways to increase plan participation. With auto enrollment, participants are given a negative election to enroll in the plan. Participants can choose the deferral rate they want, but if they don’t make an affirmative election, they are enrolled in the plan at the default deferral rate, which is specified in the plan document. Plans that use auto enrollment usually select a Qualified Default Investment Alternative (QDIA) for the investment of the auto enrolled contributions.

Plan Designs

There are several types of common auto enrollment plan designs. All of them can be paired with an auto escalation feature that automatically and regularly raises the participant’s default deferral rate.

Automatic Contribution Arrangement: This is the most flexible arrangement where certain participant groups (for example new hires only) are subject to the automatic deferral.

Eligible Automatic Contribution Arrangement (EACA): This arrangement requires that all participants are subject to the EACA and receive an annual notice. It provides plans with a 3.5-month extension of the normal 2.5-month period to complete refunds to highly compensated employees and to correct failed actual deferral percentage (ADP) and/or actual contribution percentage (ACP) non-discrimination tests. EACA plans can also allow participants who are auto enrolled a 90-day window to withdraw their first auto enrolled deferrals.

Qualified Automatic Contribution Arrangement (QACA): QACAs are safe harbor plans that require all participants to be covered and require the minimum deferral rate to be 3% of compensation. The rate must increase annually up to 6% of compensation (or the default rate can be set to 6% if the sponsor doesn’t want to administer annual deferral increases). The maximum deferral rate is 15% of compensation. The 90-day withdrawal window for auto-enrolled participants is also available in a QACA. Plans must match or make a nonelective contribution as part of a QACA. The standard QACA match is 100% of the first 1% of participant deferrals and 50% of the next 5% of deferrals. The maximum match with this formula is 3.5% of compensation. Traditional safe harbor plans have a basic match formula that equals 4% of compensation, so employers can save some expense using a QACA compared to traditional safe harbor match. Unlike traditional safe harbor plans that require the employer contributions to be fully vested, plans can apply a two-year vesting schedule to QACA employer contributions.

Other Considerations

Sponsors must work diligently with their recordkeepers or TPAs to ensure timely enrollment of the correct participants with the correct deferral rates in their payroll systems. The IRS has provided some relief for plans that make errors related to auto enrollments provided the error is fixed within 9.5 months of the following plan year and missed match contributions are provided to the affected participants.

Sponsors desiring to change or implement auto enrollment features for plan years beginning Jan. 1, 2023 should act now to ensure timely preparation of any required plan amendments and annual notices.