Auto Escalation and Flat Dollar Deferral Elections

[EagerToKnow]

We are setting up Auto Enrollment (4%) plan with Auto Escalation (1% annually up to 10%).  When we looked at plan demographics we noticed that close to 40% of participants have elected flat dollar deferral elections instead of percentages. How would administrator auto escalate someone with flat dollar deferral election? Here are a few options we have considered.  

1. Divide pay period deferrals by the pay period comp and increase the flat dollar amount by calculated 1% if needed.  This approach would potentially hurt folks with variable comp through the year, who want to ensure max deferral (402g limit) and not losing any match (match is calculated with per pay period comp).
2. Exclude anyone who has elected flat dollar deferrals from Auto Escalation.  Wondering if that would be considered definitely determinable in accordance with Regulation §1.401-1(b)(1)(ii) and uniform for EACA rules.  Currently Top choice if prior sentence holds.  
3. Only apply Auto Escalation for participants who have not made any affirmative elections.  However, that would only limit this entire plan provision to the future new hires, who never make elections.

I would like to hear your thoughts and comments.  Are there any other approaches you have seen that you would like to share?

Thanks! 

[justanotheradmin]

I'm not sure I understand. 

The auto defer / auto escalate almost always go hand in hand. If a participant is subject to one, they are subject to both. 

When plans implement these provisions for the first time they have to decide who it applies to. 

1. New hires only 

2. Current eligible employees who have never made a deferral election (this might be zero based on your description, but I find most larger companies there are at least a FEW who didn't opt out or in)

3. Current eligible employees who have never made a deferral election, or ones whose current deferral election is 0%

4. Current eligible employees who have never made a deferral election, or ones whose current deferral election is less than the starting auto enroll - in this case 1%

Which of the above will apply to your plan? Only scenario 4 would require any sort of analysis. 1% is pretty low, is there a baseline paycheck you can examine to calculate the % for those that are deferring flat amounts?

Moving forward - the auto escalation applies to folks who you auto-enrolled. If you never autoenrolled them, then their election stays as whatever they elected. Even if it would end up being less than what they would be at under the escalation. 

Very rarely (but it does happen) do I see the auto escalation bifurcated from the auto enrollment, and each provision is applied separately. You'll have to read your plan document to see if that is the case. 

[EagerToKnow]

I really appreciate your detailed response.  

Below is selected for the EACA at 4%. 

• Participants subject to the Automatic Deferral provisions. The Automatic Deferral provisions apply to Employees who become Participants on or after the effective date of the Automatic Deferral provisions, except as otherwise provided herein. Application to existing Participants. For Employees who became Participants prior to the effective date of the Automatic Deferral provisions:
  •  Affirmative Election of at least Automatic Deferral amount. All Participants, except those who have an Affirmative Election in effect on the effective date of the Automatic Deferral provisions that is at least equal to the Automatic Deferral amount and except as otherwise provided below with respect to the escalation of deferral provisions.

Therefore, on the effective day of auto enrollment, everyone who's deferrals were under 4% would be bumped up to 4%.  Problem: What to do with employees who have dollar deferral election (ex.: $50 each pay period).

Auto Escalation: 1% annually up to 8% on the first day of the plan year. 

• Unless selected below, the escalation provisions will not apply to Participants with an Affirmative Election
  • The escalation provisions will apply to Participants with an Affirmative Election of at least 0% of Compensation.

Therefore, annually, anyone who is not at 8% would be bumped up by 1%.  Yet again, we are not sure what to do with participants with flat dollar deferral elections.  

Thank you!

[C. B. Zeller]

I would think you would use the greater of the elected flat dollar amount or the auto-escalated percentage, computed each pay period. For example, it's the participant's 2nd year so their auto-escalation rate is 5%. When they first became eligible, they elected to contribute $50 per paycheck and have not made an affirmative election for the second year. Week 1, their pay is $1200. 5% of $1200 is $60, so their contribution is $60. Week 2, their pay is $900. 5% of $900 is $45, but they affirmatively elected to have $50 withheld, so their contribution is $50.

For the participants who want to defer the annual limit, they will already be making an affirmative flat dollar election each year, so the auto-escalation will not apply.