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Governmental plans and automatic enrollment

Automatic enrollment is a plan feature designed to drive plan participation and improve retirement readiness of plan participants. This plan feature is available for use with many governmental retirement plans. Read on to learn more about the benefits to implementing automatic enrollment (auto enroll), certain restrictions, specific arrangements available to government plans, and next steps to implement an auto enroll feature in your plan.

What is auto enroll?

Auto enroll is a plan design feature that allows plan sponsors to “enroll” an eligible employee in their retirement plan, unless the employee elects to opt out.  While most often seen in 401(k) plans, auto enroll is also available to many 403(b), 457(b), and grandfathered 401(k) plans sponsored by governmental employers.

Why consider auto enroll?

Auto enroll is fairly easy to set up, can improve plan participation rates and encourages employees to save for retirement as soon as they are eligible.


“Automatic enrollment has been a topic among governmental plan sponsors for a long time; and I am pleased to see a significant amount of traction with states proactively addressing wage law constraints to allow for the automatic enrollment of their governmental employees.  Where Voya has implemented automatic enrollment for our governmental plan sponsors, we have seen success in improving plan participation. For instance, two of our state plans have realized participation rates around 85% and still climbing,” says Amy Heyel, SVP, National Practice Leader for government markets.

 

 

Is auto enroll available to all government plans?

No. There may be restrictions to implementing an auto enroll feature in certain government plans, depending on two main factors:  state wage withholding laws, and governmental employers with employees who are part of a collective bargaining unit. 

Possible restrictions to implementing automatic enrollment for governmental plans:

  • State wage withholding laws may be a barrier to implementing automatic enrollment by prohibiting employers from deducting amounts, other than mandatory taxes, from an employee’s paycheck without the express consent of the employee. While the Pension Protection Act of 2006 preempts state laws that restrict or prohibit deferrals to a retirement plan without the participant’s consent, that preemption only extends to retirement plans subject to the Employee Retirement Income Security Act of 1974 (ERISA). Plans sponsored by governmental employers (including public schools) are not subject to ERISA. Accordingly, 403(b), 457(b), and grandfathered 401(k) plans sponsored by a governmental employer can offer an automatic enrollment feature only if there is no wage withholding prohibition for such deferrals under state or local law.
  • In addition, governmental employers with employees who are part of a collective bargaining unit should also review any applicable collective bargaining agreements to determine if they need to be amended to accommodate an automatic enrollment feature under the retirement plan.

Next steps

If a governmental employer has determined that state law does not impair its ability to offer an automatic contribution feature:

  1. Determine which type of automatic enrollment feature – an automatic contribution arrangement (ACA) or the eligible automatic contribution arrangement (EACA) – the plan will offer. (See the chart below for specifics.)
  2. Amend the plan document to permit the automatic enrollment feature in accordance with the criteria that the governmental employer has established.
  3. Determine the investment option in which automatic contributions will be invested unless the participant provides investment direction.
  4. Establish procedures for:
    • providing notice, initially and on an ongoing basis, to impacted employees of the automatic contribution feature;
    • deducting automatic enrollment amounts from wages and remitting the contributions to the designated provider under the plan;
    • permitting participants to opt out of future contributions; and
    • if the automatic enrollment feature is structured as an EACA, how a participant’s request to withdraw automatic contributions will be processed.
  5. Review and update employee communications -- including collective bargaining agreements, employee handbooks, and plan summaries – to reflect the addition of the automatic enrollment feature.

The following chart outlines two automatic enrollment options and the key features of each option.

Automatic enrollment arrangements* available to governmental plans

Plan Provision Automatic Contribution Arrangement (ACA) Eligible Automatic Contribution Arrangement (EACA)
General Description A deferral percentage is automatically contributed for eligible employees who do not have a valid deferral agreement in place, or have not opted out of the ACA. A uniform deferral percentage is automatically contributed for eligible employees who do not have a valid deferral agreement in place, or have not opted out of the EACA.

Note: an EACA generally may be added to the plan only effective as of the beginning of the plan year.

Eligible Employees Employees meeting plan criteria are automatically enrolled in the plan. Employees meeting plan criteria are automatically enrolled in the plan.
Rate of automatic deferral Plan determines the automatic deferral percent. Uniform automatic deferral percent, as determined by the plan.
Annual Automatic Rate Escalator Permitted Permitted
Investment of Automatic Contributions Plan-designated investment option until the participant provides investment direction. Plan-designated investment option until the participant provides investment direction.
Ability to Opt Out of Automatic Enrollment Participants subject to an ACA may elect either to:
  • Stop contributions to the plan; or
  • Elect a different deferral percentage
Participants subject to an EACA may elect either to:
  • Stop contributions to the plan; or/li>
  • Elect a different deferral percentage
Participant Withdrawal of Automatic Contributions before distributable event Not permitted Permissible upon participant request made no earlier than 30 days and no later than 90 days of the first automatic deferral.

Note: Any matching contributions attributable to withdraw automatic contributions are forfeited.

Notice Contents Notice must include an explanation of:
  • Automatic contribution default percentage provided under the plan;
  • A participant’s right to not participate in the ACA and how to elect out;
  • Default Investment option of automatic enrollment contributions;
  • Information about electing to:
    • Contribute an amount different from the plan’s automatic enrollment contribution;
    • Select another investment option, if permitted by the plan.
Notice must include an explanation of:
  • Automatic contribution default percentage provided under the plan;
  • A participant’s right to not participate in the EACA and how to elect out;
  • Default Investment option of automatic enrollment contributions;
  • Information about electing to:
    • Contribute an amount different from the plan’s automatic enrollment contribution;
    • Select another investment option, if permitted by the plan;
    • How and when to withdraw automatic enrollment contributions.
Timing to Provide Notice Notice must be provided initially before an employee becomes subject to an ACA and annually thereafter:
  • Initially: at least 30 days but not more than 90 days before the date that employee is eligible to make elective contributions (or, if applicable, becomes subject to the ACA).
    • Special rule for newly hired employees immediately eligible to participate in the plan, notice may be provided on the date of hire.
  • Annually: At least 30 days but no more than 90 days before the beginning of each plan year thereafter.
Notice must be provided initially before an employee becomes subject to an EACA and annually thereafter:
  • Initially: In general, at least 30 days but not more than 90 days before the date an employee becomes eligible to make elective contributions (or, if applicable, becomes subject to the EACA).
    • Special rule for newly hired employees immediately eligible to participate in the plan, notice may be provided on the date of hire.
  • Annually: At least 30 days but no more than 90 days before the beginning of each plan year thereafter.

*An additional form of automatic enrollment, known as a Qualified Automatic Contribution Arrangement (QACA), provides a plan with relief from certain nondiscrimination testing requirements. Since governmental plans are deemed to be nondiscriminatory under the Taxpayer Relief Act of 1997, a QACA would not appeal to governmental employers.

Explore more on automatic enrollment.

 

This material has been provided for educational purposes only for sponsors and prospective sponsors. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation.

IRS Circular 230 Disclosure: Any tax advice contained in this document (including any attachments) was not intended by the author of this document to be used, and cannot be used by the audience or any other person, for the purpose of avoiding any Internal Revenue Code penalties that may be imposed on such person. Any tax advice contained in this document was not intended by the author of this document to be used or referred to, and cannot be used or referred to, in promoting, marketing, or recommending the transaction(s) or matter(s) addressed herein.  3/19

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