Should a plan sponsor continue, or get rid of, its automatic-contribution arrangement?

Until recently, many employee-benefits lawyers advised an employer not to provide an automatic-contribution arrangement. Why? Because an employer might administer the arrangement imperfectly, sometimes missing some people, and that would call for corrections and expense.

Have law changes made those worries smaller? Are the exposures smaller? Are the fixes less expensive?

Here’s why I’m thinking about this:

A charity, unadvised until now, provides an automatic-contribution arrangement for its § 403(b) plan. The default is 3% of pay, with yearly increases until 6% of pay.

I believe the charity will have lapses and errors that result in failing to start elective deferrals for people to be auto-enrolled. I believe the charity is unable to design and implement work methods to avoid inevitable lapses and errors.

The automatic-contribution arrangement is not needed to meet any coverage or nondiscrimination rule.

Internal Revenue Code § 414A does not require an automatic-contribution arrangement because the plan’s elective-deferral arrangement was established before December 29, 2022.

Should the plan sponsor continue, or get rid of, the automatic-contribution arrangement?

If you suggest keeping the arrangement, what can I say about why the charity’s exposure to corrections is only a small risk?

The correction for a missed deferral opportunity in a plan with automatic enrollment is extremely liberal with plans having up to 9-1/2 months after plan year end to start deferrals before penalties kick in.  Without the AE feature, the charity will at best have 3 months to offer enrollment to and start deferrals for eligible employees before some significant corrections are required.  If they are not up to the task of managing eligibility and enrollment, the AE feature provides some time for their service providers to keep them out of serious trouble.

Just a thought.

I'm a pretty big fan of autoenrollment. I'm not a big fan of auto escalation. I encourage clients to implement auto enrollment at 10% (requiring no subsequent escalation). It usually solves the problem of getting the forms back timely.

Paul I and Bill Presson, thank you for your impressive thinking.