Automatic Enrollment population - Modification of Alloc %

[buckaroo]

What if a person does not modify their auto enroll deferral %, but does modify their investment allocation %? Does this person remain in the autoenrollment group or does the affirmative investment allocation % remove them from the group?

Example: A ptp in a plan is auto enrolled at 3% and has their contributions placed in the default investment election. The participant modifies the investment election to have the future elective deferrals invested in a different fund.

The plan now wants to increase the automatic enrollment % from 3% to 5%. Would this person still be included in ther automatic enrollment population and, thus, have their deferral % increased from 3% to 5%? Or would the change of investment election take them out of the auto enrollment population and cause their % to remain at 3%?

Side note: If the participant does not change the default investment election, but does transfer funds, would this change to their account balance take them out of the auto enrollment population?

Any help is greatly appreciated. Any cites would be desirable as well.

[Lou S.]

Unless the submit an affirmative deferral election percentage I would assume they remain in the default election.

That is investment direction is separate from deferral election.

[BG5150]

I would say they are still auto enrolled, b/c they haven't given any written (or electronic) direction as to what percentage is coming from their pay.

So, they should get the annual notice. If they are going from 3% to 4% and they want to stay at 3%, then they'll have to make an affirmative election. Same thing with the 3% to 5% jump--they'll be getting a notice, and if they want to stay at 3%, they'll have to tell someone.

About your side note: do you mean to ask if someone transfers investments, but keeps allocation in the default fund, are they still part of the QDIA? (instead of auto enroll?)

[buckaroo]

Thanks for the replies. I have been doing some digging and I have found the following from Internal Revenue Bulletin: 2009-12. It is a small portion from the 414(w) Regs where it talks about definitions and appears to back-up my thoughts, but wanted to post it for others to view and comment. In part, it says:

(e) Definitions. Unless indicated otherwise, the following definitions apply for purposes of section 414(w) and this section.

(1) Applicable employer plan. An applicable employer plan means a plan that—

(i) Is qualified under section 401(a);

(ii) Satisfies the requirements of section 403(b);

(iii) Is a section 457(b) eligible governmental plan described in §1.457-2(f);

(iv) Is a simplified employee pension the terms of which provide for a salary reduction arrangement described in section 408(k)(6); or

(v) Is a SIMPLE described in section 408(p).

(2) Automatic contribution arrangement. An automatic contribution arrangement means an arrangement that provides for a cash or deferred election and which specifies that, in the absence of a covered employee’s affirmative election, a default election applies under which the employee is treated as having elected to have default elective contributions made on his or her behalf under the plan. The default election begins to apply with respect to an eligible employee no earlier than a reasonable period of time after receipt of the notice describing the automatic contribution arrangement. This default election ceases to apply with respect to an eligible employee for periods of time with respect to which the employee has an affirmative election that is currently in effect to—

(i) Not have any default elective contributions made on his or her behalf; or

(ii) Have contributions made in a different amount or percentage of compensation.

(3) Covered employee. Covered employee means an employee who is covered under the automatic contribution arrangement, determined under the terms of the plan. A plan must provide whether an employee who makes an affirmative election remains a covered employee. If a plan provides that an employee who makes an affirmative election described in paragraph (e)(2)(i) or (e)(2)(ii) of this section remains a covered employee, then the employee must continue to receive the notice described in paragraph (b)(3) of this section and the plan may be eligible for the excise tax relief with respect to excess amounts distributed within 6 months after the end of the plan year under section 4979(f)(1). Such an employee will also have the default election reapply if the plan provides that the employee’s prior affirmative election no longer remains in effect and the employee does not make a new affirmative election.