Automatic Enrollment Proposed Regulations

January 2008

An automatic contribution arrangement is a plan provision which automatically enrolls participants into the retirement plan at a specified salary deferral percentage unless the participant elects otherwise. The Pension Protection Act of 2006 created an optional safe harbor design for plans with automatic enrollment, called a qualified automatic contribution arrangement.

On November 7, 2007, the Internal Revenue Service (IRS) released proposed regulations for automatic contribution arrangements. The regulations are effective for plan years beginning on or after January 1, 2008, and may be relied upon until final guidance is released. The new arrangements are available to 401(k), 403(b), and 457(b) governmental plans.

Qualified Automatic Contribution Arrangement (QACA)

Plans that meet the QACA design requirements automatically satisfy the ADP and may satisfy the ACP test and the top heavy rules. Here are the safe harbor design requirements:

• Unless the participant elects otherwise, the automatic contribution percentage must be at least 3% for the initial period, 4% the first year following the initial period, 5% the second year following the initial period and 6% the third year following the initial period (never to exceed 10%).
• The automatic contribution applies to new eligible employees and current eligible employees that do not have on file an affirmative election to either make or not to make (i.e. a zero percentage election) elective deferral contributions.
• An employer must make either a non-elective contribution for all eligible non-highly compensated employees (NHCEs) of at least 3% of compensation, or a match for NHCEs of 100% of deferrals up to 1% of compensation, plus 50% of deferrals in excess of 1% up to 6% of compensation (or a permitted equivalent).
• Employer contributions must be 100% vested within two years.
• Participants must be provided a notice within a reasonable period before each plan year.

Eligible Automatic Contribution Arrangement (EACA)

An EACA is an automatic contribution arrangement that meets the following:

• The default elective contribution must generally be a uniform percentage of compensation.
• Participants must be provided a notice within a reasonable period before each plan year.
• In the absence of an investment election by the participant, the contributions are invested in a default investment that is a Qualified Default Investment Alternative (QDIA) as defined by the Department of Labor.

Plans that meet the requirements for an EACA may (not required to) allow employees who failed to opt-out timely to receive a withdrawal of their automatic elective deferral plus earnings within 90 days after the first payroll period the automatic enrollment took effect. The distribution is taxed in the year of receipt and is not subject to the 10% early withdrawal penalty.

Refunds to correct ADP test failures in a non-safe harbor automatic enrollment plan must be made within 6 months after the end of the plan year to avoid penalties.

Notice Requirement

The notice must be written so that it can be understood by the average participant. The notice must explain:

• The amount of salary deferral contributions that will be made on the employee's behalf, unless they elect otherwise.
• The employee has the right to elect to not have elective deferral contributions made, or elect a different percentage.
• The default investment.
• Other specific plan provisions.

The notice must be provided to each eligible employee within a reasonable time period before the beginning of each plan year. The timing requirement is met if the notice is provided at least 30 but not more than 90 days before the beginning of each plan year.

Participants that receive a notice that meets the requirements are treated as exercising control over the assets in the account which are invested in a default investment that is a QDIA as defined by the Department of Labor.