WHAT COULD BE better than walking into a prospect’s office, and being able to truly promise what the prospect wants the most:  increased participation in their retirement plan?

In the past few years, the industry has witnessed an increased interest in automatic enrollment for 401(k) plans. And, while sponsors were attracted to the feature’s potential for increasing participation, many feared the legal implications associated with its adoption.

Now, however, certain provisions of the Pension Protection Act (PPA) provide ERISA preemption over state laws, offer safe harbor from nondiscrimination testing, provide administrative relief… and some peace of mind for those interested in “automating” their plan.

ERISA rules… over state laws

The PPA provides that under ERISA, plans with automatic enrollment features can enjoy preemption of state wage garnishment laws if their plan meets the following requirements.

• Participants must be automatically enrolled at a deferral level spelled out in the plan, unless they opt out or choose a different deferral percentage.
• Contributions must be made to a multi-asset class default investment, unless the participants direct their own investments.
• Appropriate notices must be given to employees.

Bypassing the tests with flying colors

Under PPA, a plan can enjoy safe harbor[1] from nondiscrimination testing and would not be subject to top-heavy rules if:

• Auto enrollment provisions apply to all new hires and other employees that the employer deems as eligible;
• Deferral rates are at least 3% for the first year, increasing by 1% each year, up to a maximum of 10% of compensation per year;
• The plan sponsor matches 100% of the first 1% deferred and 50% of the next 5% deferred, or makes a non-elective contribution of 3% of compensation — with 100% vesting after two years in both cases;
• There are no other contributions to the plan (such as profit sharing), only employee deferrals and the safe harbor contribution;
• Annual notices are provided to employees;
• Plan sponsors notify participants before the beginning of each plan year, explaining how their money will be invested in the absence of participants’ election, and their right to opt out of the plan or change their deferral percentage; and
• Employees are given a reasonable amount of time to respond to the notice and make an affirmative election before auto enrollment begins.

What a relief

Plan sponsors with certain automatic enrollment arrangements can also benefit from more administrative relief thanks to the PPA. These more relaxed provisions include:

·         An extended period for making refunds of excess contributions (6 months instead of 2 1/2 months), and no excise tax to plan sponsor;

·         A 90-day employee bail-out period for employees who are automatically enrolled; and

·         No testing required for deferrals of automatically enrolled employees who bail out.

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