Automatic 401(k)/403(b) Programs Get a Break
One of the biggest downsides to implementing automatic enrollment or auto increase (“Auto Programs”) has been improved. Auto Programs have been one of the fastest growing programs for retirement plans. According to the Plan Sponsor Council of America’s 57th annual survey, 50.2% of plans utilize automatic enrollment and 44% of those plans utilize automatic increase programs. Auto Programs are a great way to increase participation in a plan and if done right, increase the average deferral percentage for employees.
Two of the biggest downsides to Auto Programs, in my experience, are:
Employees tend not to change their contributions. If you auto enroll them at 3%, they stay at 3%. This can leave employees saving way too little for retirement. Getting them in is important, but equally important is having them save realistic amounts. Having an auto enrollment and increase program can help get employees into the plan and over time, get them to save realistic amounts if the limits are set correctly.
If due to an administrative error, you forget to auto enroll someone or implement an auto increase for someone or a group of people, the plan sponsor is on the hook to contribute money to fix the administrative error. This can lead to a windfall for the employee, because the employer would have to make a contribution on behalf of the employee without the money coming out of the employees paycheck. For plan sponsors, this is a shock and has the potential to cost them a lot of money.
On April 2, 2015, the Internal Revenue Service issued Rev. Proc. 2015-28 that reduces the penalties for correcting this administrative error. The changes fall into three categories:
Plans with Automatic Contribution and/or Auto Increase Provisions
If error is discovered within 9 ½ months after the plan year end – No Qualified Non-Elective Contribution is required.
Plans that do not have an Automatic Contribution Arrangement
If error discovered within three months – No Qualified Non-Elective Contribution is required from plan sponsor.
If error is discovered after the three month period, but within the Self Correction Program correction period – The plan sponsor would need to deposit 25% of the missed deferrals as a Qualified Non-Elective Contribution.
The previous rules required the plan sponsor to contribute a 50% Qualified Non-Elective Contribution.
Under all cases, the plan sponsor must begin the deferral election, provide notice to impacted employees and make corrective contributions for missed matching contributions.