Employers and lawmakers have long grappled with how to increase employee participation in company-sponsored retirement plans. While participation has risen in recent years, especially at larger companies that have implemented automatic enrollment, the Department of Labor has estimated that 30% of eligible workers still do not contribute to a 401k account. And many others do not save as much as they likely will need for retirement.
The Pension Protection Act of 2006 (PPA) included several incentives for employers to add automatic-enrollment features to their plans. Growing use of auto-enrollment, it was hoped, would not only increase participation, but also save time and effort for both employees and benefits managers.
Whether your company has never had automatic enrollment (AE) and is now considering it, or you are thinking of changing your AE feature, it’s important to know how the IRS and Department of Labor view and govern AE. Which of these three AE options is best for your company? It depends on your firm’s size and appetite for administrative and compliance tasks:
1. Basic automatic contribution arrangement (ACA): The simplest option. The plan document specifies that after a certain length of time on the job, the employer will notify the employee of upcoming retirement plan contributions, and then begin re-directing a fixed percent of the worker’s to a retirement account, unless he/she opts out of participating.
2. Eligible automatic contribution arrangement (EACA): Very similar to the basic option, but in this case the employee may withdraw automatic contributions, including earnings, within 90 days of the date of the first automatic contribution. This option also includes rules more specific than ACA’s about how the employer is to notify employees about key provisions of the plan.
In addition, EACA requires that the plan use a uniform percentage for all employees (or for certain groups of employees) when automatically increasing the percent of pay contributed to retirement accounts.
3. Qualified automatic contribution arrangement (QACA): Built largely on EACA rules, a plan using QACA becomes exempt from the 401k nondiscrimination test (otherwise known as the ADP test) which can limit the deferral amounts by highly compensated employees. Some QACA requirements include:
- A 3% of pay deferral with 1% annual increases up to at least 6% (not to exceed 10%)
- Mandatory employer contributions to employees’ accounts, and
- a special vesting schedule
Employers whose retirment plan currently do not include AE can modify their plan document to add it. To discuss which automatic enrollment option might be best for your organization, please call us at (312) 762-5960 or