Decoding Automatic Enrollment in 401(k) Plans: A Comprehensive Guide for Employers

At HR Ledger, we understand that navigating the world of retirement plans can be complex. To help simplify, we’re taking a closer look at an increasingly popular option: automatic enrollment in 401(k) plans.

Automatic enrollment is a retirement savings plan feature where employees are automatically enrolled into their company’s 401(k) plan, unless they choose to opt out. This approach has several variations, each offering different advantages:

1. Basic Automatic Enrollment or Automatic Contribution Arrangement (ACA) – In this setup, a specified percentage of an employee’s salary is automatically deducted and contributed to the plan. Employees can choose to opt out or adjust the contribution amount.
2. Eligible Automatic Contribution Arrangement (EACA) – Similar to ACA, EACA has specific notice requirements and allows employees to withdraw their automatic contributions within 30-90 days of their first contribution.
3. Qualified Automatic Contribution Arrangement (QACA) – Along with notice requirements, QACA specifies employer contribution amounts, a vesting schedule, and a default percentage for automatic enrollment.

Whichever option you choose, you may also include features like default investments, automatic escalation of contributions over time, and different default rates for contributions. The SECURE Act, for instance, raises the deferral cap for automatic enrollment safe harbor plans from 10% to 15%.

Automatic enrollment offers numerous benefits for both employers and employees. It boosts plan participation rates, encourages early retirement savings, and offers tax savings for pretax contributions. Plus, the SECURE Act provides a tax credit to eligible employers who add an automatic enrollment feature to their 401(k) plan.

Setting up an automatic enrollment 401(k) plan involves deciding on the type of plan, creating a written plan document, selecting a trustee, developing a recordkeeping system, and providing employees with necessary notices.

While automatic enrollment is currently voluntary, it’s crucial to keep abreast of federal legislation that may require mandatory enrollment in the future. As always, retirement plans are heavily regulated, and rules change, so we recommend working with a professional to ensure compliance.

We hope this guide provides clarity on automatic enrollment in 401(k) plans. If you have any questions or need assistance, the HR Ledger team is here to help.