Stacey Bradford, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:
This is one of those questions where it would be prudent for the Experts to point out that the Internal Revenue Service (IRS) has developed a series of useful online FAQs on various topics, including automatic enrollment (note: the IRS labels such arrangement “automatic contribution arrangements” but they are more commonly referred to as automatic enrollment arrangements). These FAQs, though not official guidance, can provide a lot of useful information to plan sponsors, and the automatic enrollment FAQs are no exception. This specific situation is addressed in the question regarding adding automatic enrollment to an existing retirement plan, as follows (boldface text reflects the Experts emphasis):
An employer may add an automatic contribution arrangement feature to its plan simply by amending the plan to state that it will use an automatic contribution arrangement. Generally, the amended plan would need to specify:
- the plan’s default percentage rate for automatic enrollment contributions;
- the employee’s right to elect not to contribute to the plan;
- the employee’s right to elect to contribute an amount different from the plan’s default percentage rate for automatic enrollment contributions;
- the procedures for how an employee can elect not to contribute or contribute an amount different from the plan’s default percentage rate for automatic enrollment contributions;
- how an employee’s automatic enrollment contributions will be invested if the employee does not make an investment election, if an investment election is permitted by the plan;
- the procedures to be used to give the required automatic contribution arrangement notice to both existing plan participants, if covered, and new employees eligible to join the plan; and
- the additional requirements applicable if the plan chooses to add an eligible automatic contribution arrangement (EACA) or a qualified automatic contribution arrangement (QACA), both of which generally cannot be added to a plan mid-year.
The employer would then apply the automatic contribution arrangement to the employees as specified in the amended plan. The employer would also need to have employee election forms available for all employees covered by the automatic contribution arrangement.
Thus, automatic enrollment can generally be applied to new employees, existing employees, or both. However, as the links listed above indicate, there are particular types of automatic enrollment arrangements under the Code, an eligible automatic contribution arrangement (EACA) or a qualified automatic contribution arrangement (QACA), which do require uniform participation by all eligible employees (existing and new hires). However, an automatic enrollment arrangement is not required to be an EACA or QACA. (Having a QACA can provide a safe harbor for the plan to pass 401(m) testing on a matching contribution that meets the requirements.)
NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.
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