FLASH IN THE PLAN: MANDATORY AUTOMATIC ENROLLMENT IS HERE!

By: Adrienne I. Moore, Esq.

For years, employers have been able to choose to automatically enroll employees in their 401(k) or 403(b) plans (also called “cash or deferred arrangements” or “CODAs”) to increase participation and, hopefully, inspire their employees to save more for retirement. Automatic enrollment arrangements have been so effective at increasing participation, Congress recently took steps to make them compulsory. Many plans that permit participants to make deferral elections are required to enroll their participants automatically for plan years beginning after December 31, 2024.

Here are the basics of the new requirements.

What is Automatic Enrollment?

Typically, no employee salary deferral contribution will be made to a plan unless the participant affirmatively elects to have that contribution made. If no election is made, it is interpreted as if they chose not to participate.

Automatic enrollment (also known as an “automatic contribution arrangement”) flips this assumption on its head. A plan with automatic enrollment defines a default deferral percentage that applies to participants unless they make their own election (either to contribute or not). If a participant makes no election, they are deemed to have “chosen” the automatic enrollment rate. Under the law, once a participant is automatically enrolled, they are treated the same as a participant who makes an affirmative deferral election. If you fail to automatically enroll someone when it is time to do so, that failure is the same as if you didn’t implement a participant’s affirmative election – it affects the qualified status of the plan and requires correction.

You must provide participants with an automatic enrollment notice between 30 and 90 days before it applies to them, so that they have an opportunity to make an alternative deferral election or opt out.

What Plans and Employers are Subject to Mandatory Automatic Enrollment?

This requirement applies to all plans whose CODA was established – that is, documented and signed – on or after December 29, 2022. (Why the odd date? That is the day the applicable law was signed.) That means that if a profit-sharing plan that was adopted in 1987 added a CODA in 2024, it must initiate mandatory automatic enrollment. A plan where both the profit sharing and CODA features started in 2016, however, would not be subject to mandatory automatic enrollment.  Note that the signature date is what is critical – the effective date could be later than December 29, 2022, and the plan would still be exempt from mandatory automatic enrollment.

Are Any Other Plans Exempt from Mandatory Automatic Enrollment?

Governmental and church plans are exempt from these rules. Other than that (and previously established plans, discussed above), the law provides two more exemptions. They are:

1. “New Companies”: Employers that have been in business for fewer than three years as of the beginning of the plan year; and
2. “Small Companies”: Businesses that “normally employ” fewer than 11 employees.

Companies that cease to be “Small Companies” must adopt automatic enrollment by the first day of the plan year that is at least 12 months after they have 11 employees.

If your company has been in business fewer than 3 years but it is continuing operations of another company that was previously in existence, talk to your third party administrator (“TPA”) or lawyer.  Special rules may apply.

What Does “Normally Employ” Mean?

Here, the rules get a bit sticky. A full-time employee counts as one employee. Part-time employees count as fractional employees based on the hours they typically work in a week compared to a normal full-time work week (“normal” cannot exceed 8 hours per day or 40 hours per week). An employer “normally employs” 11 people if there are at least 11 people on the payroll during 50% of the fiscal year.

What Automatic Enrollment Provisions Must My Plan Include if I am Subject to These Rules?

The requirements for the specific automatic enrollment plan provisions are:

• Automatic Enrollment Rate: The default deferral percentage during the participant’s first year of participation must be not less than 3% or more than 10%. The specific percentage is defined in the plan document.
• Automatic Increase: If the automatic enrollment rate is less than 10%, the participants’ deferral rates must automatically increase annually. On the first day of each completed year of participation, the percentage is increased by 1% to a maximum percentage (set by the plan) of 10% to 15%. Note that the requirements have 10% as both a possible minimum and a maximum. This means that a plan could avoid annual increases by setting the deferral percentage as 10%.
• Affirmative Election: The participant must be able to make an affirmative election to defer a different percentage, or nothing at all, at any time.
• Permissible Withdrawals: Permissible withdrawals allow a participant to change their mind soon after they are automatically enrolled. This is usually a situation where an employee ignored the notice and was automatically enrolled, only to panic when they see their take-home pay decrease because of their deferrals.  The plan must permit participants, within 90 days of their first deferral, to elect to stop deferrals and have their money refunded to them out of the plan.  (Any matching contribution that they received on the refunded deferrals is forfeited.)
• Default Investment: Deferrals must be invested in accordance with the Department of Labor’s qualified default investment alternative (QDIA) regulations, unless the participant makes a different investment election. If your plan does not have participant-directed investments, contact your TPA or attorney to discuss this rule.

Although the rules set certain minimum requirements, there is still flexibility in the mandatory automatic enrollment provisions. You will want to discuss your plan design options with your TPA to ensure you are set up for success.

Want More Details?

We have published articles delving deeper into the various mandatory automatic enrollment rules, which are linked below. This is a complex topic and, even though automatic enrollment has been around for some time, mandatory automatic enrollment is still a new and growing area to understand. If you have any questions on mandatory automatic enrollment, reach out to your TPA. They will have the knowledge and resources to walk you through the requirements. And if you still have questions, let us know. Remember: we are your ERISA solution!

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