Automatic Enrollment News

By Debra Davis

Significant changes have been made to automatic enrollment arrangements by the Pension Protection Act of 2006 (PPA). The key provisions of the PPA include preemption of state law and a nondiscrimination safe harbor.

In order for state law to be preempted:

• participants must be automatically enrolled at a level of deferrals specified in the plan, unless they opt out or select a different percentage;
• contributions must be placed in a multi-asset class default investment (in accordance with regulations issued by the Department of Labor) if the participants do not direct the investment of their accounts; and
• appropriate notices must be given to participants.

Under the PPA, there are two kinds of automatic enrollment plans. The first is called an “eligible” automatic contribution arrangement. As with traditional 401(k) plans, it is subject to the ADP, ACP and top heavy rules. The second is a safe harbor, or “qualified,” automatic contribution arrangement. It is similar to a safe harbor 401(k) plan in the sense that minimum contributions, vesting and notices are required, and that the plan is deemed to comply with the ADP, ACP and top heavy requirements. The safe harbor automatic contribution arrangement requires that:

• the automatic enrollment provisions apply to all eligible employees;
• there must be automatic participant deferrals at least equal to 3% for the first plan year in which the participant is enrolled; 4% for the second year; 5% for the third year and 6% per year thereafter; but in no event may more than ten percent (10%) per year may be automatically deferred;
• the employer must make: (a) an annual matching contribution of 100% of the first percent deferred and 50% of the next five percent deferred, or (b) a profit sharing contribution of 3% (with 100% vesting after two years in both cases); and
• notices must be provided to participants before the beginning of each plan year that explain the participant’s right to opt out or change the deferral percentage and how the participant’s account will be invested if they do not provide investment directions. Also, participants must have a reasonable period of time to specify the percentage of their deferrals after receiving the notice and before the automatic enrollment begins.

Participants may request the return of their deferrals under an automatic enrollment arrangement within 90 days after the date the first deferral is made under the arrangement. This option is only available if participants can opt out of the arrangement or change their deferral amount, are provided with notices and their contributions are placed in a multi-asset class default account if they fail to select the investments for their accounts.

The automatic enrollment provisions added by the PPA will be valuable for employers by giving them confidence that they are not inadvertently violating state payroll withholding laws and by providing them with the flexibility to use the safe harbor nondiscrimination provisions or elect not to. Unfortunately, the PPA’s interaction with existing automatic enrollment plans is unclear. Hopefully these issues will be addressed in future guidance.

© 2006 Luftman Reicher & Cohen. All rights reserved. The Report to Plan Sponsors is published as a general informational source. Articles are general in nature and are not intended to constitute legal advice in any particular matter. Transmission of this report does not create an attorney-client relationship. Reish Luftman Reicher & Cohen does not warrant and is not responsible for errors or omissions in the content of this report.

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