escalation, auto-escalation, auto enrollment, ACA, automatic contribution arrangement

[LANDO]

It is possible to apply an automatic escalation feature to non-ACA participants? In other words, can a sponsor automatically escalate participants that have made an affirmative deferral election? Plan sponsor wants to have an ACA (at 3%) with an escalation provision of 1% per year up to 8%, but also wants to auto-escalate participants who have elected to defer less than 8% by 1% every year till they hit 8%. Example: Participant affirmatively elects to defer 2% on July 1st, sponsor wants to auto-escalate this participant to 3% on the following January 1st. To me this is like an having a new auto-enrollment date every year for participants that have made an affirmative deferral election, however, instead of being autoenrolled at 3%, they just get increased by 1%.

Part II: Does the escalation of non-ACA participants feature need to be in the plan document, or can this simply be an administrative policy and be described in the enrollment form? Our Volume Submitter document is not well suited to incorporating this feature as the only auto-escalation language is tied to the auto-enrollment feature.

Part III: Must a participant be able to elect out of the auto-escalation feature? Is there a way to avoid allowing a non-ACA participant to opt out of auto-esclation?

Believe me, I would never recommend this feature to a sponsor, but as you know, some sponsors are a lot smarter than the rest of us.

Any insights would be appreciated.

[oneilbr]

Hi Lando,

I'm interested in this approach, but I haven't been able to find any advice that definitively allows plan sponsors to do this. The closest I can find is an auto sweep, where the plan sponsor can auto enroll any participant that is contributing less than the default automatic enrollment date. It seems like most participants who are under contributing would be more receptive to slowly increasing their contribution rate, rather than just boosting it up to a set rate. Were you able to find out any more on this subject?

Thanks

[LANDO]

Our document vendor said this is more of a deferral election feature and suggested the enrollment form should make clear that participants electing to defer less than the max escalation amount (in this case 8%), would be auto-escalated each year by 1%. That way when the participant signs their deferral election form they are agreeing to this feature. The participant can always affirmatively elect to keep their deferral election the same, or change the percentage, and the plan would need to accommodate that. I don't disagree with this approach, but it's a little cumbersome to modify the forms, and even more cumbersome for online enrollment/deferral change accounts.

We have a couple of plans that use a similar feature, and I simply drafted language into the ACA section of our VS document outlining the feature, and then included a description of the feature in the SPD. To my knowledge none of the plans we've used this feature on have been the subject of a DOL or IRS examination, but I'm thinking the provision should hold up. Also, given that the IRS is not inclined to issue determination letters on amendments, I don't know that there's much more we can do here.

Good luck.

[oneilbr]

Thanks Lando, I guess this provision would only apply to new participants, since they would be the only ones that have signed the new form agreeing to this feature. If the plan sponsor wanted to apply this to all their participants, they would need an auto enrollment event?

The IRS is becoming less helpful every day.

[LANDO]

That makes sense to me. Auto enroll everyone and force them to fill out a new deferral election form if they don't want to be defaulted, and then the new form would include the special language about auto escalation even for participants who made an affirmative election of less than the max escalation %.

I wonder if you could only auto enroll those who have made an affirmative deferral election of less than X%?

[oneilbr]

Our primary volume submitter adoption agreement permits automatic enrollment for employees that have made an affirmative election less than the automatic enrollment amount.

Automatic Enrollment (Traditional or QACA)
a. Indicate who will be eligible to receive automatic contributions:
i. Eligible Employees who have not made an Elective Deferral election
ii. All Eligible Employees to the extent that no election was made or their Elective Deferral elections are less than the automatic enrollment amount
iii. Other:

[LANDO]

Seems like election a.ii. would only capture those that were deferring less than initial automatic enrollment amount...like the base amount. I guess I'd clarify that anyone deferring less than the highest escalation percentage is going to be auto-enrolled. Just a suggestion.

In any case sounds like a fair amount of work. Document amendment, updating enrollment forms, re-enrollment, updating payroll records, etc. Then what happens if someone who was deferring in excess of the max escalation amount, and therefore wasn't subject to the ACA, changes their deferral percentage to be zero, or something in between? Seems like perhaps you should apply the ACA to everyone so they have to fill out the new form agreeing to be auto-escalated annually even if they aren't subject to the ACA.