Auto Enroll w/Auto Escalate

[Tracy Fedele]

I have a plan that has auto enroll.  They are going to add auto escalate at 1% per year up to 6%.  My understanding is that a participant can elect/agree with the auto escalate but elect a cap/maximum of less than the 6% maximum.  Example, Nancy New is auto enrolled at the 2% but completes the enrollment form indicating she wishes the auto increase to stop at 4%.  Is this possible?  We have a bit of an internal debate within the office on this.

Thanks!

[Larry Starr]

8 minutes ago, Tracy Fedele said:

I have a plan that has auto enroll.  They are going to add auto escalate at 1% per year up to 6%.  My understanding is that a participant can elect/agree with the auto escalate but elect a cap/maximum of less than the 6% maximum.  Example, Nancy New is auto enrolled at the 2% but completes the enrollment form indicating she wishes the auto increase to stop at 4%.  Is this possible?  We have a bit of an internal debate within the office on this.

Thanks!

Did you look at your documents?  Always start with RTFD!  I bet the language you would add (assume you are using a known document) has language that specifically says the increases are subject to participant's ability to prevent them.  Let us know.

[Tracy Fedele]

It is a FIS/Relius document.  It does have a section for the EACA but this is auto enrollment with auto escalate only so I am unsure those specific rules will apply for this purpose.  Below is the section of the plan document outlining affirmative election under the EACA.  Based on this, I think they could elect to cap the auto increase if this also applies to vanilla Auto Enrollment/Increase.

 

(viii)Effect of Affirmative Election. A Participant's Affirmative Election continues in effect until the Participant
subsequently revokes or modifies his or her Salary Deferral Agreement, or the Affirmative Election expires. A Participant
who makes an Affirmative Election is not thereafter subject to the Automatic Deferral or to any scheduled increases thereto,
even if the Participant later revokes the Affirmative Election or the Affirmative Election, unless the Participant is subject to
the EACA. In addition, a Participant who is subject to the EACA provisions who revokes his or her Affirmative Election or
whose Affirmative Election expires, will be deemed to have made an Affirmative Election to have no Elective Deferrals
made to the Plan.
 

[Larry Starr]

11 hours ago, Tracy Fedele said:

It is a FIS/Relius document.  It does have a section for the EACA but this is auto enrollment with auto escalate only so I am unsure those specific rules will apply for this purpose.  Below is the section of the plan document outlining affirmative election under the EACA.  Based on this, I think they could elect to cap the auto increase if this also applies to vanilla Auto Enrollment/Increase.

 

(viii)Effect of Affirmative Election. A Participant's Affirmative Election continues in effect until the Participant
subsequently revokes or modifies his or her Salary Deferral Agreement, or the Affirmative Election expires. A Participant
who makes an Affirmative Election is not thereafter subject to the Automatic Deferral or to any scheduled increases thereto,
even if the Participant later revokes the Affirmative Election or the Affirmative Election, unless the Participant is subject to
the EACA. In addition, a Participant who is subject to the EACA provisions who revokes his or her Affirmative Election or
whose Affirmative Election expires, will be deemed to have made an Affirmative Election to have no Elective Deferrals
made to the Plan.
 

Did you prepare the document?  What form of FIS document is being used?  Is the language you quoted from a plan that already has auto escalation in it?

We do only volume submitter (FIS) docs (no adoption agreement) but there is an option in the checklist (see item 55 if you use checklist to produce docs) that deals with Escalation of Affirmative Election and gives a bunch of options, including the first one that say participant affirmative deferral election will NOT be subject to automatic escalation.  You need to go back to look at what your document CAN DO when you add automatic escalation (not what is already in the document if the document does not currently have that language).

[Luke Bailey]

Tracy Fedele, if all you have is a common law autoenrollment arrangement (ACA), then I think what you describe would not violate any rule of the Code or regs. Whether the plan document allows it is subject to the usual analysis, and I would not hazard a guess without reading it.

If you have an EACA (basically, an ACA that allows a nonconsenting participant to get a distribution of autodeferred amounts within 90 days of first auto deferral under 414(w)) or a QACA under 401(k)(13), giving you a pass on ADP if you make certain employer contributions in conjunction with the auto deferrals, then I think what you described would probably be viewed as violating the uniformity rules of those provisions, which don't seem to permit a participant to set a limit order, so to speak, on his/her default contribution percentage as set by the plan for participants generally. You can read those uniformity requirements in those code sections and the regs under them. Of course, the participant could always just replace the default election with an affirmative election and get to the same place.

[AKconsult]

My understanding, and the way our document works, is that the participant is EITHER auto enrolled OR makes an affirmative election for something else.  Then auto escalation is just the next step of the auto enrollment.  In other words, only participants who do not make an affirmative election and are therefore auto enrolled will later be subject to the escalation.  But any of that can be stopped at any time if/when the participant makes an affirmative election.

So, if Nancy is auto enrolled at 2% (because she did not affirmatively opt out of the auto enrollment), then she should be automatically escalated each year UNTIL such time as she makes an affirmative election.  Once she makes an affirmative election, that will override any automatic changes.  So she could be auto enrolled at 2%, automatically escalated 1% each year until she hits 4%, but then she would need to complete an affirmative election saying she only wants to defer 4%.  Now she is no longer an auto-enrolled person and therefore escalation does not apply to her.

In your OP you said she completed an enrollment form.  That fact in and of itself, to me, indicates she was not auto enrolled.  In which case I would think she would need to complete a form saying she wants 2% withheld, then later amend the  form to say she wants 3% withheld, then later 4% withheld, etc.  I don't think she would be swept into the auto escalation process at all if she ever completes a form.