Automatic Enrollment Exemption for New Firms

[Below Ground]

Plan is a MEP that has been in effect since the 90's.  Company that is established in 2023 decides to become a Participating Employer in 2024, and adopts the Plan in Summer of 2024.  Since there is an exemption from the automatic deferrals for a firm that has been in business less than 3 years, I believe that Automatic Enrollment would not apply for 2025 since the business has not been in effect for at least 3 year on 1/1/2025.  Does this exemption then end in 2026 since the firm will then have 3 years of business at that time?  Basically, does the exemption end once the firm has been in business for 3 years?

[G8Rs]

Yes. I would plan on auto enrollment on 1/1/26 even if the business was started sometime in 1/1/2023. The reason is because we don’t have a transition rule in the stature similar to what is there for the less than 10 employee exception. That exception gives you until the year following the year you exceed the threshold. The new business exception doesn’t have a similar rule so it would be safest to apply auto enrollment as of the first day of the year in which the employer is expected to be in business 3 years. Maybe by 2026 the IRS will provide a transition period.  

[Peter Gulia]

Here’s the text G8Rs refers to:

“Subsection [414A](a) shall not apply to any qualified cash or deferred arrangement, or any annuity contract purchased under a plan, while the employer maintaining such plan (and any predecessor employer) has been in existence for less than 3 years.”

Internal Revenue Code of 1986 (26 U.S.C.) § 414A(c)(4)(A)
http://uscode.house.gov/view.xhtml?req=(title:26 section:414A edition:prelim) OR (granuleid:USC-prelim-title26-section414A)&f=treesort&edition=prelim&num=0&jumpTo=true

 

[Below Ground]

Thanks to both G8Rs and Peter Guila for their replies.  Another question, if I may?  For the EACA used to satisfy the automatic enrollment requirement, does it make sense to set the initial rate at 10%.  My thoughts are that since this is at the "required maximum" of 10% you would not need to deal with the automatic escalations.  In addition, using 10% would be more likely to get the participant's attention versus a rate like 3%.  I believe that a person is more likely to respond with the request to file an election when the failure to reply will haver 10% charged against the paycheck versus a lower rate like 3%.  This will, if I am right, result in fewer permissive distributions to account for the "I didn't want anything taken from my check so give me my money back".  This and the elimination of attending to automatic escalations will then make the client firm's job easier to deal with, which is rather important when they do payroll in-house and the person doing payroll is "less than good" with processing payroll.

[Peter Gulia]

Some TPAs recommend setting an arrangement’s initial (and only) default contribution percentage at 10%.

Their reasoning is avoiding escalations.

Your hope that fewer inattentive participants fall into a deferral one regrets might help a little.

Setting the contribution percentage is a plan-design, not fiduciary, decision.

This is not advice to anyone.

[Below Ground]

Thanks Peter.  Always nice to confirm issues.  Anyway, the Client in question is rather weak with issues like payroll.  While they can code deferrals, dealing with escalations would be a disaster.  It is one reason that for some clients automatic enrollment is not the best choice.  And while I may confirm or dispute my opinion with replies such as you provide, it is never viewed as advice.  It is just another practitioners opinion of a specific topic, that could be wrong or right.  So no, it is not advice and setting the initial default deferral is clearly a design issue, hence my explanation of the client being weak on this topic.  But rest assured, your comments are always greatly valued so thanks again.