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EACA with Automatic Escalator


ErisaGooroo

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401(k) Plan with EACA provision

Plan has default percentage at 2%, with auto escalation of 1% up to 8%.  Auto escalation feature does not apply to HCEs (this special provision is written in the plan document).  The plan sponsor has used the 90 day permissible withdrawal provision (elected in the AA) afforded to EACA but NOT the 6 month extension to cure ADP/ACP failures.  All other requirements of EACA have been satisfied except for what is mentioned here.

Ultimately, the Plan Sponsor wants to have the ability to use the 6 month extension without auto escalating the HCES due to ADP testing issues.  With the uniformity requirement, I don't think that is possible because they exclude the HCEs from the auto escalator. BUT - then I started to wonder about the use of the 90 day permissible withdrawal feature (which the plan sponsor has used in the past) in a plan that may not be EACA at all (uniformity requirement). 

Question -

1. Does the exclusion of HCEs from the auto escalation feature prevent the arrangement from being considered an EACA and therefore no 90 day w/d provision allowed? 

2. Would excluding the HCEs from the automatic enrollment provision altogether allow the plan to be an EACA with use of 90 day w/d provision and 6 month extension on ADP/ACP? My thought here is that the HCES would no longer be considered a "covered employee" and there no issue with uniformity requirement.

Any guidance you can provide here would be greatly appreciated.

E

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Why does the company want to exclude HCEs from auto-escalation?  How many HCEs are being automatically enrolled, and how many of them will stay in the program?

Management can just send them a e-mail every year:  Hey, pick your deferral %!

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They want to exclude the HCEs from the automatic escalator of 1% each year because they already have issues with failed ADP test and there are many HCEs who take advantage of the plan. 

HCEs usually make an election well above the 2% default rate, (usually around 5% or so to avoid ADP failure).  They don't want to include the HCEs in the auto escalation of 1% up to 8% due to increased potential for ADP failure.

If the HCE makes an affirmative election, that means he/she is not a covered employee, and would not be included in the EACA feature.  But, there are some that haven't made an affirmative election, so I'm concerned with EACA status because plan uses that 90 day permissive w/d feature.

 

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If they are that concerned with an HCE not making an election, have management bug them until they do make an election.

Has the plan used current year testing for a while?  They might be able to switch to prior year testing and then they will know going into the year (pretty much) what the HCEs as a group can put in.

Do they make a match?  Or, is the plan top heavy?  Would a QACA be a good idea?

And, just think, if the HCE is auto-enrolled now at 2%, then they aren't getting to 5% for another 3 years.

Lastly, what's wrong with a failed ADP test?  That only means the HCE are putting as much as they can into the plan given what the staff does.  A passing ADP test means that some HCEs could have saved more.

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Plan uses prior year testing method for ADP.  Yes, they make a reasonable match (100% up to 3%).  Most HCES receive slight refunds each year which they hate.  They do not want to do QACA - I've mentioned SH ad nauseam - and it's always a NO.  Most HCES have made an affirmative election to defer at least 5%. 

My concern is the off chance that one HCE has not made an affirmative election, is considered a "covered employee" and per the special rule in the AA is not subject to the auto increase.  I am thinking this violates the uniformity requirement which negates the EACA.  The reason I'm concerned about that is that they've processed 90 day w/d for some participants who were at the time a part of the auto enroll provision. 

Thoughts on this? 

 

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There's no exception in the uniformity requirement for excluding HCEs so I think you violate it and cannot use the 6-month correction period nor make permissible withdrawals. If all you care about are permissible withdrawals then you could exclude the HCEs from both the auto deferral and the auto escalation. But if you do that you can't use the 6-month correction period and it seems that's more important to the employer than permissible withdrawals.

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Thanks for the reply.  That's what I think, also.  Now to see if there have been any permissive withdrawals processed so I can discuss EPCRS SCP.

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  • 9 months later...

Can an EACA arrangement be amended for auto escalation any time during a plan year or must the auto escalation be effective as of the beginning of a plan year?

It has been an EACA arrangement but did not previously have an auto escalation feature and they want to add one.

thanks in advance!

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