IRS Elaborates on Automatic 401(k) Enrollments

April 16, 2004 ( - The Internal Revenue Service (IRS) has shed some light in an information letter on the design and implementation of automatic enrollment programs in 401(k) plans.

As originally laid out, the IRS program for automatic enrollment imposes a 3% automatic compensation reduction on all eligible employees. Under those guidelines, the plan must provide employees with appropriate notice at the time of initial eligibility and annually thereafter, invest the corresponding elective deferrals in a balanced fund, and permit changes to the compensation reduction percentage at any time, according to an EBIA report.

These programs were originally described by the IRS in Revenue Ruling 2000-8.

In the latest information letter – meant only as informal guidance – the IRS notes there is no safe harbor automatic compensation reduction percentage, so a program’s percentage may be higher or lower than the 3% specified in the original ruling and that an automatic compensation reduction percentage may increase or otherwise change over time pursuant to a specified schedule.

Additionally, the information letter provides the automatic compensation reduction percentage, or any increases to the percentage, may apply in whole or in part to one or more future increases in or supplements to compensation, or it may be conditioned on taking effect or scheduled to take effect at the time of any such compensation increases or supplements.  

Also applying to the reduction percentage, it need not be tied to the percentage of elective deferrals that are matched by the plan.   However, all applicable nondiscrimination limitations apply to all elective deferrals, regardless of whether or not the deferral was automatic or voluntary.

Further, elaborating on the necessary participant notices, the IRS said the initial and annual notices for an automatic enrollment program must contain a sufficient description of how current and future automatic compensation reductions will function.