401k auto enroll recapture

[Guest ghal]

We have an basic safe harbor match with an auto enroll of 3%. We understand that a participant can elect any percentage including zero if they don't want to be auto enrolled at 3%. However, the plan sponsor would like to make the participant opt out (change their deferral percentage to zero every year). For example. the sponsor wants to look at all deferral rates once a year on a specified date (assuming we give the details in the safe harbor notice). Any employees deferring 0% will automatically be enrolled again at 3% until they opt back out. The problem I see is that an employee has elected to defer 0% in a prior year, if we do this then we override an election. The question is, can you have an auto enroll provision that applies to everyone each year that will recapture anyone who has elected 0% in a prior year? If so, any good reference material?

Thanks

CPC, ERPA

[ETA Consulting LLC]

The question is, can you have an auto enroll provision that applies to everyone each year that will recapture anyone who has elected 0% in a prior year? If so, any good reference material?

Thanks

CPC, ERPA

You actually can. The issue becomes how the auto enrollment election actually becomes a deferral. Prior to the law passing to allow the auto enrollment, a 401(k) deferral had to be based on an election of the participant; and still is. The rule provided that as long as advanced notice was given to the 'eligible' employee stating that 'if they do nothing, this amount will be deducted', the employees failure to act would be deemed as their election. There is nothing in the code limiting this application to a one time event for each employee. The only requirement is that an appropriate amount of time is given to each employee to either elect out or to change their percentage. There is also a provision that states it "may" be used for employees who are already eligible; and not merely limited to those employees becoming eligible to defer for the first time.

These are all in Section 401(k) of the Code.

Good Luck!