Under the new regulations for Qualified Automatic Contribution Arrangements, there is a new safe harbor for defined contribution plans that adopt an automatic enrollment policy. The automatic enrollment safe harbor may be less costly for employers than the current safe harbor because the employer matching contribution is lower and participant vesting in the employer matching contribution is not immediate. Further, plans that provide the automatic enrollment safe harbor can avoid all ADP and ACP tests as well as meet the top-heavy rules.
If a plan adopts an automatic enrollment policy and safe harbor, employees are automatically enrolled in the defined contribution plan, unless the employee affirmatively declines participation in the plan. Upon automatic enrollment, a percentage of the employee’s compensation is automatically deferred into the plan with applicable employer matching contributions, and all contributions are directed into a security investment selected by the plan sponsor. Generally, the minimum requirements for employee deferrals under the new regulations require that the plan automatically enroll an employee in the plan who did not affirmatively decline participation, defer 3% of that employee’s compensation through the end of the plan year following the automatic participation, and then increase that deferral by 1% for each of the next three years. The plan may also allow participants to withdraw the automatic deferrals under certain circumstances.
Due to the automatic enrollment safe harbor, plan sponsors may want to consider putting such an arrangement in place in time for the next plan year. If so, you must notify participants before the start of the new plan year of their right to opt out of the automatic deferrals or to change deferral amounts. To put such an arrangement in place for 2008, most plan sponsors must provide this notice by December 1st. Note that the IRS has provided a sample Automatic Enrollment and Default Investment Notice at http://irs.gov/pub/irs-tege/sample_notice.pdf.
If you have any questions about a Qualified Automatic Arrangement or wish to adopt such an arrangement for your plan, please contact SGR’s Employee Benefits Group.