Mandatory Auto Enrollment Workaround

[austin3515]

A lot of bigger companies use onboarding/hr systems that guide people through filling out employment paperwork. And some of them have a very low paid demographic for whom a "blind" application of auto enrollment would result in a nightmare for clients.  People making minimum wage have trouble paying for rent and groceries.  How do we feel about a form with the following options (paraphrasing)?  The point would be to get them to respond and make it easy for them to opt out.  There are often language barriers and technology challenges, etc.

  

By intialling here _____________,I confirm that the following statement applies to me:

I understand the automatic enrollment provisions of the Plan and I do not wish to be automatically enrolled in payroll deduction contributions, nor to have my contributions automatically increased each year. If and when I decide to contribute to the Plan I will make an affirmative payroll deduction contribution election. 

If no election is made above you will be automatically enrolled in the Plan as described in the Automatic Contribuion Arrangement Notice.

[Peter Gulia]

Among the conditions for an eligible automatic contribution arrangement, Internal Revenue Code § 414(w)(4)(B)(ii) requires: “the employee has a reasonable period of time after receipt of the notice[.]” Also, an EACA notice must mention the range of choices.

One can imagine the Treasury or its IRS interpreting those concepts to say an employer ought not suggest that a participant must complete her choice any sooner than the end of the notice period. Likewise, an employer ought not to suggest that making a cash-or-deferred choice is a necessary element of completing the onboarding that confirms an employment.

So, a plan’s administrator might rewrite your idea:

{Your expression of a choice against elective deferrals.}

If by {specify a date}, our retirement plan’s administrator has received none of:

(i) your choice permitted above,

(ii) your other choice to have nothing taken from your pay for retirement savings, and

(iii) your choice of the percentage of your pay (no less than 1%, and no more than 92%) you want to not receive in money and defer under our retirement plan,

we will take nn% from your pay each pay period and treat those amounts as your elective contributions to our retirement plan, as further explained in the preceding notice.

This is not advice to anyone.

[david rigby]

"initialing"?  Never ask for initials if you can ask for a signature. And a date.

[Peter Gulia]

Many computer systems have no function for something that looks like an old-fashioned signature. Many require typing one’s name, or just one’s name’s initials, as the electronic signature. (For example, for something Temple University asks me to sign, the system instructs me to enter the two characters “PG”, and would refuse to process anything else.) Or if an individual is already identified to the system, it might ask only for a click on an “I accept” or “I confirm” button. Likewise, the system often records the date a keystroke or click was entered or a function was processed.

[austin3515]

Peter does "re-write" require the plan sponsor to "check" everyone to see if they opted out regardless of this language though, right?  My goal was that after the employee finishes their onboarding employee paperwork (I9/W4 etc) they have a very short list of people who would be auto enrolled.  So the goal is to allow people to make a broad statement that they don;t want to be auto enrolled - either because they don't want to contribute at all, or want to pick their own rate.

[austin3515]

You might say the only thing they are opting out of is automatic enrollment. That's probably a better way to put into words what I am trying to do.

[Peter Gulia]

Its fine to ask in an efficient and effective way for the employee’s choice, even if the invitation presumes the likely choice is the opt-out.

What I suggest you and your clients consider is that the IRS might worry that the last sentence:

“If no election is made above [that is, in the HRIS system], you will be automatically enrolled in the Plan as described in the Automatic Contribution Arrangement Notice.”

Could be read to suggest that the only way an employee specifies her choice is in the HRIS system (and that she may not deliver her election by other means).

Could be read to suggest that the employee, if onboarding, specifies her choice as an element of the onboarding (and lacks other ways to deliver her election).

Could be read to suggest that the only choices are an election for no deferral or for the default deferral.

Could be read to suggest that the new employee’s choice is concluded now, rather than by the end of the notice period.

Even if the preceding EACA notice is perfect and even if there might be good arguments about why the HRIS screen does not interfere with anyone’s notice or election opportunities, one can imagine some IRS people evaluating the facts and circumstances differently.

As I understand the purpose you described, it’s to use an available opportunity to capture a no-deferral election because the employer fears an employee who prefers no deferral might, without being prompted by the HRIS system, neglect to do an opt-out.

To meet that purpose, the system’s collection of a no-deferral or opt-out election need not be irrevocable. An employee who in the HRIS system specifies an opt-out is unlikely, during the notice period, to change her election from an opt-out to an affirmative election specifying her (nonzero) elective-deferral percentage.

And if an employee changes her mind, the employer can deal with it then.

Your idea is good.

Rather, it calls for a little attention to what the words say, possible meanings a reasonable reader could perceive, and how IRS people might assert possible reasons a particular notice and election regime didn’t exactly meet what tax law calls for. A little editing might make your way one that meets its purpose and helps avoid an IRS challenge.

This is not advice to anyone.

[austin3515]

Thank you Peter! 

I want to offer some context here.  I am really concerned about this going into 2025.  The following example is not at all unusual.  Clients for 20 years have said  "I cannot add auto enrollment, this is not right for my demographic."  And they were right, they knew their employees.

Let's assume an entrepreneur owns 50 MacDoodles and has 100 people a year become eligible. They ALL make minimum wage (or within $2 or $3 an hour of minimum wage).  Let's assume the Employer is not as "aggressive" as I am proposing they should be in giving every opportunity to opt out.  Does anyone disagree that rather than being over the moon that their employer cares so much about their retirement years, the employees will instead be calling payroll to find out what moron messed up their paycheck which is now a full $15 less a week?  providing these people with instructions on how log into some other website is just not going to cut it.

We all need to find a solution for this.  This will not go well, I promise you. This is a disaster waiting to happen for a client like this.

[Belgarath]

14 hours ago, austin3515 said:

This will not go well, I promise you.

Truer words wuz never spoke! It'll be ok for many employers, and others will botch it badly. Retirement looks more attractive all the time...

[Peter Gulia]

I’m curious, which do you, or employers, fear more:

That an IRS examination might look into an employer’s administration of an automatic-contribution arrangement, find errors or weaknesses, and threaten to tax-disqualify the § 401(k) arrangement?

Or

That employees who did not opt out will feel frustrated that one’s pay was lowered, and will blame the employer (rather than public law)?

[Belgarath]

Well, we all know that complete disqualification (the death penalty) is not likely, so I'd drop that fear down to second place.

However, employees blaming their employer, at least initially, is very likely. Since taking personal responsibility is apparently considered anti-American in our society, the first course of action is to blame someone else. The fact that as an employee I didn't read the communication(s), or didn't question it if I didn't understand it, etc., is immaterial. (All right, I'm done with that rant.) And of course, there will also be many situations where the employer did not enroll people when they SHOULD have been enrolled.

[austin3515]

The biggest issue by far is that to opt out, one has to a) read the materials; b)  comprehend the materials; c) have the ability to login in to whatever website it is that requires the election; d) have the technology to do that login.  That excludes a huge swath of the population.  Mind you I have clients who successfully completed MEDICAL SCHOOL who are excluded from this class.

The traditional employer who adds auto enrollment (other than by mandate) has robust employee communications, not a huge amount of turnover,  employees making well above minimum wage (let's say more than $50,000).  Then, when they get auto enrolled, they were already aware, and they're not worried about paying the rent.  IF they were, HR had the time to help them opt out. 

Everything at MacDoodles is the complete opposite of this.

[AlbanyConsultant]

I've been wrestling with this as well, and we going down the same road - your wording is much more direct and succinct than mine was (I'm approaching a half-page, probably explaining way too much).

I've been thinking about the plans with payroll bridges and things like that.  The RK handles the initial notice, and then if the participant doesn't log in within 30 days they send a file to payroll somehow to turn on the deferrals at the automatic rate.  While I agree that getting a tree-pulp piece of paper into someone's hands is a great way to try and circumvent getting AE'd, when it gets returned it somehow has to become an interruption to a process that is becoming increasingly computerized.

For the ones where it's going back to the ER and they are making changes to payroll manually, this is a lot more workable.

[austin3515]

I didn't fill in the whole process but for those who opt out, the plan sponsor has to go into the website and document an affirmative election for 0%.  I know Empower for example permits that.  I've been using a simple opt out form like this for a while for a client with auto enroll, but a large group of field workers who never use computers for work, and who would not want to be auto enrolled in general.  They all sign my little one pager opting out and then the sponsor records it on the website.  This prevents the recordkeeper from entering the auto deferral on payroll. 

Its not great to add the extra step, but it's a lot better than the alternative.