Auto Enrollment with annual 1% increases

[Guest M. Martin]

A 401(k) plan has an auto enrollment feature starting with a 1% deferral rate for new participants, plus annual increases of 1% up to a maximum of 5% of pay.

A newly eligible participant is auto enrolled at 1% during 2007 and terminates employment later in the year. The individual is gone for all of 2008 and is returning to employment in 2009.

The document is silent and I haven’t found any guidance in the regs as far as at what deferral rate he should be set-up with upon rehire: 1% as a first year participant, 2% as a second year participant, or at 3% as if he never left?

[Guest Sieve]

The auto enrollment plan design you discuss is not covered in the regs unless you are wanting to permit the 90-day return rule or unless you want a QACA (which this is not). In any event, there is very little guidance out there for the plain vanilla auto enrollment/escalation as it existed prior to the issuance of the QACA & 90-day withdrawal regs, so I believe you could handle it any way you want to as long as the plan is drafted properly or as long as your administrative procedures are permitted to cover these matters and they are consistenet with plan provisions.

This may not have been much help to you, but that's because I think, frankly, we're left to our own devices in this increasingly well-traveled countryside due to lack of basic, building-block guidance.

[BG5150]

Not only must they be consistent with plan provisions, but they should be consistent from employee to employee...

Did this person accrue a year of service (1000 hrs in many plans) in 2007? If so, you could make the argument to increase to 2%; if not, I (read: BG5150) would probably keep it at 1%.

[PLAN MAN]

I agree, without the plan document spelling things out there is not any specific guidance out there.

Here are some thoughts:

What triggers the annual salary deferral increase? Must the employee be employed at a particular time, accrue any hours of service or just have their service recognized under the plan?

What does the plan document say about when/how a participant satisfies the requiremens for the annual salary deferral increase?

Upon rehire, if the employee's prior service is counted for eligiblility purposes, may it be counted for automatic increase purposes?

I think the plan administrator should take some time now and establish written procedures for handling this, so they can apply it equally to all situations. This will take some thinking and interpretation of the plan document.

[Guest M. Martin]

Thank you all for your thoughts. I agree, an administrative decision must be made and be applied consistently to all employees.

The plan eligibility requirements are 1 year of service with 1,000 hours and age 21 with semi-annual entry dates. The participant was hired in 2006 and had 1,000 hours in 2006 and 2007. The plan provides for immediate entry upon rehire. The document is silent concerning recognizing prior service for purposes of the auto increases.

The auto enrollment feature does provide for the 90-day rule. A combined QDIA and auto enrollment notice is distributed to all participants in November for the upcoming plan year and to all newly eligible participants. The trigger for the annual increase is the participant not making an affirmative election. The portion of the notice that outlines the auto increase reads as follows:

If the automatic enrollment feature applies to you, 401(k) tax deferred contributions equal to the percentage of your eligible compensation as outlined below will be deducted from each paycheck and contributed to the Plan automatically on your behalf, unless you elect otherwise by turning in a Participant Enrollment & Election Form to the Plan Administrator. This automatic enrollment provision will apply to you if:

•You are first eligible to participate in the Plan during the 2009 Plan Year. Your Employer will automatically enroll you in the Plan and will begin withholding 1% of your compensation each pay period, which will be contributed to the Plan on your behalf. This will be effective with your first pay date in 2009 that occurs after your plan entry date.

•You were automatically enrolled in the Plan in 2008 and you have not otherwise made an election to have zero or a different percentage or dollar amount withheld from your pay, then your automatic enrollment percentage will increase from 1% to 2% beginning with your first paycheck in 2009.

•You were automatically enrolled in the Plan in 2007 and you have not otherwise made an election to have zero or a different percentage or dollar amount withheld from your pay, then your automatic enrollment percentage will increase from 2% to 3% beginning with your first paycheck in 2009.

•You were automatically enrolled in the Plan in 2006 and you have not otherwise made an active election to have zero or a different percentage or dollar amount withheld from your pay, then your automatic enrollment percentage will increase from 3% to 4% beginning with your first paycheck in 2009.

•If you are currently participating in the Plan at a percentage or dollar amount that you have actively elected, then your current election will continue to be followed and will remain in effect until you modify or stop it.

[Guest Sieve]

There's been discussions on this Board previously about deferral percentage elections upon rehire. Some say the old percentage applies at rehire, and others think a new one must be signed or else it's 0% just like a new hire. I lean towards the latter approach, since a termination of employment ought to make administrative items begin anew upon rehire (i.e., requests for compeltion of new beneficiary designation forms, new info re: health care & group-term life, etc., etc.)--including a request to compelte a new deferral election form for the 401(k) plan.

So, my approach for an auto enrollment/escalation plan would be that this employee should not enter the plan until given the opportunity to complete a new election form--or, if none is completed, then the auto enrollment/escalation should start anew as if eligible for the very first time. I think that's a reasonable approach, and very uncomplicated, but you'd have to setttle on your own adminsitrative approach.

[J Simmons]

This is an interesting thread, and I think Sieve nails it with the best reasoning.