Key Takeaways
- Plan sponsors must actively oversee automatic enrollment and escalation to ensure eligible employees are enrolled and contribution rates align with plan documents.
- Certain 401(k) and 403(b) plans must use 3% to 10% automatic enrollment rates and annual 1% escalation to at least 10% but no more than 15%.
- Regular payroll and recordkeeper reconciliations help plan sponsors detect retirement plan errors and determine required corrections, contributions and notices.
Automatic enrollment and automatic escalation are key plan provisions that plan sponsors use to help their employees save for retirement and increase plan participation. These provisions, however, are not “set it and forget it” features. They require active oversight from the plan sponsor to ensure that eligible employees are properly enrolled and escalated in accordance with the plan’s eligibility requirements as specified in the plan document.
Understanding Automatic Enrollment and Escalation
There are three primary types of automatic enrollment:
1. Automatic Contribution Arrangement (ACA): Eligible employees are automatically enrolled at the contribution rate specified in the plan document unless they opt out or elect a different rate.
2. Eligible Automatic Contribution Arrangement (EACA): The plan’s default contribution rate is uniformly applied to all covered employees. The plan sponsor must give notice to each employee of the EACA, and the plan may permit withdrawals within 30 to 90 days of the first contribution withholding. Notices are required upon initial eligibility and annually thereafter, when required.
3. Qualified Automatic Contribution Arrangement (QACA): A QACA is a safe harbor automatic enrollment arrangement that must satisfy specific automatic contribution and employer contribution requirements. When these requirements are met, the arrangement satisfies the safe harbor requirements that exempt 401(k) plans from annual ADP and ACP testing. The same initial and annual notice requirements for an EACA generally apply to a QACA.
The SECURE 2.0 Act generally requires certain 401(k) and 403(b) plans established on or after December 29, 2022, to include automatic enrollment and escalation beginning with plan years after December 31, 2024. Exceptions apply to certain existing plans, governmental and church plans, SIMPLE 401(k) plans, new businesses and small employers. Automatic enrollment and escalation in retirement plans established on or after December 29, 2022 are subject to the following requirements:
- For automatic enrollment, they must use a default contribution rate between 3% and 10%.
- For automatic escalation, the rate must be increased by 1% annually to at least 10%, but no more than 15%.
Although retirement plans established prior to December 29, 2022 are grandfathered in and exempt from the requirements above, many retirement plans voluntarily include automatic enrollment and escalation provisions of their own.
Implementation and Monitoring of Automatic Enrollment
To properly implement automatic enrollment and escalation, plan sponsors should communicate proactively with their payroll provider and recordkeeper to establish:
- the plan’s eligibility requirements;
- default contribution rate;
- escalation timing; and
- treatment of employee elections (automatic enrollment and subsequent escalation, opt-out, and affirmative alternate election).
These discussions should also be used to establish who is responsible for each step of the process. For example, the plan sponsor will feed the new employee data to the recordkeeper. The recordkeeper will then determine which employees are eligible to participate in the plan. Once determined, the recordkeeper will maintain employee elections and feed them directly to the payroll provider each week. Before payroll is processed, the plan sponsor will perform a review of all changes to ensure they were captured completely and accurately.
Periodic reviews should also be performed by the plan sponsor such as monthly or quarterly to reconcile employee elections and contributions between the payroll records and recordkeeper reporting. Responsibilities for this process may vary depending on the terms of the service agreements between the plan sponsor and the vendors.
Identifying and Correcting Errors in Automatic Enrollment
Even with an established process and internal controls designed to prevent errors, they may still occur. Potential errors include, but are not limited to:
- Not following eligibility or entry date requirements
- Not picking up all eligible employees
- Missing an opt-out or alternate affirmative election, which results in the employee being improperly automatically enrolled
- Not applying the automatic increase on the date defined in the plan document
Once an error is identified, the plan sponsor should work to identify the extent of the error. This includes identifying which employees are affected, how long the issue persisted, the amount of employee deferrals that were either missed or overcontributed, and, if applicable, any related missed employer matching contributions.
Depending on the nature and timing of the error, certain automatic enrollment or escalation features may be eligible for correction under applicable IRS correction procedures. Plan sponsors should evaluate the applicable correction method, including whether corrective contributions, lost earnings, employee notices or other corrective actions are required.
For instance, a group of employees hired within the same quarter were not properly picked up for automatic enrollment. For the period when those employees were not automatically enrolled, the plan sponsor must determine whether a corrective contribution is required for the missed deferral opportunity and the related employer matching contribution. This correction may also require an adjustment for lost earnings. Any required notices should also be provided to affected employees describing the error and the correction.
Closing
Effective oversight of automatic enrollment and escalation requires ongoing coordination among the plan sponsor and its service providers, along with periodic review of eligibility, participant elections, and contribution activity. Establishing appropriate monitoring procedures can help plan sponsors identify operational issues timely and address them before they become more significant compliance concerns.
Contact Us
If you have questions about how to implement or monitor automatic enrollment and/or escalation in your retirement plan, our Employee Benefit Plan Services team can help assess your plan’s provisions, related procedures and controls, and identify areas for potential improvement. Please contact your PKF O’Connor Davies client service team or:
Timothy J. Desmond, CPA
Partner-in-Charge, Employee Benefit Services
tdesmond@pkfod.com | 551.249.1728
Louis F. LiBrandi, EA, CEBS, ChFC, TGPC
Partner
llibrandi@pkfod.com | 646.449.6327
Brian Erker
Supervisor
berker@pkfod.com