Is auto-enroll an actual "feature"?

Client wants to set up a separate plan from its current existing 401(k) plan, in order to cover separately a new group of employees whose employer they'd purchased.

Twin plans, so to speak, they'll have all the same contributions options/investments, etc.

But, as a new plan, this one's going to be subject to mandatory enrollment, right?  The other plan's grandfathered as not to have it, and they don't plan to change that.

I don't recall auto-enrollment being something subject to BRF testing.  

But can anyone confirm/refute that for me?  (Leaving aside for now what would actually be tested - there could be new owner HCEs right away, before we suggest these will all be NHCEs off the jump.)

Thanks.

-bri

What is the reasoning for a separate plan?

They bought a group of stores they want to keep separate from their primary line, I guess - I got the question from top management as to how the 410b6C was going to come into play, whether they wanted to keep the acquired employees separate, so when he mentioned they wanted to give them a separate plan but mirror the provisions to make 410b easy, the question of the auto-enrollment and whether that would count as a BRF sorta bubbled up.

Auto-enrollment doesn't mandate (in the context of an employee cannot elect out of) a specific deferral amount, or mandate a specific match formula, or mandate a specific NEC.  AE also doesn't mandate a specific eligibility, vesting or benefit accrual.  AE mandates a specific process for enrolling new entrants.  There doesn't look like there is anything that requires BRF testing.

You don't say if this was a stock or asset sale, and do seem to imply that the purchase has been consummated and the seller's plan was terminated prior to the sale. If any of this is not true, then there are other issues (such as successor plan rules, continuity of the plan sponsor...) that could factor into the decision-making.

How will they handle transferring employees?

I suppose it would depend on which way they transfer, if any of them indeed do!

Anyway, I'm not involved with the client, this was the boss's request to check on, as I was really wondering if having one plan with MAE suddenly suggests the need to test that against a grandfathered plan.  In theory that "might" (ha!) be the only real practical difference between the plans.

(I also have no idea why they'd balk at just sweeping them up into the existing plan, to be fair.)

To answer the question asked - 

Automatic enrollment (including EACA and QACA) is treated as a plan feature. Treas. Reg. §1.410(b)-7(c)(1) lists examples of features subject to nondiscrimination testing, and while it doesn’t name auto-enrollment explicitly, features that affect how deferrals are made and how participants participate in the plan clearly fall under this.

The IRS has informally confirmed that automatic enrollment is a BRF. See, for example, the IRS 401(k) Plan Fix-It Guide, which makes it clear that when two plans exist, the availability of different features (like auto-enrollment, loan provisions, hardship withdrawals, etc.) must be tested to ensure nondiscrimination.

Here’s the rule jsample mentions: 26 C.F.R. § 1.410(b)-7(c)(1) https://www.ecfr.gov/current/title-26/part-1/section-1.410(b)-7#p-1.410(b)-7(c)(1).

To borrow a phrase from Derrin Watson about this type of question "You're looking for a sleeping black cat in a dark room ... except there isn't really a black cat there. There's no real guidance."

Thanks, guys - I think the better reference actually ended up 1.401(a)(4)-4(e)(3) for the BRF details under the nondiscrimination regulations rather than the coverage ones.

Internal Revenue Code § 401(a)(4) calls a plan to “not discriminate in favor of highly compensated employees[.]”

Here is 26 C.F.R. § 1.401(a)(4)-4(e)(3) https://www.ecfr.gov/current/title-26/part-1/section-1.401(a)(4)-4#p-1.401(a)(4)-4(e)(3).

Even if one assumes that the presence or absence of an automatic-contribution arrangement, because it involves “election rights” or for another reason, is an “optional form of benefit”, reasonable minds might differ about whether an automatic-contribution arrangement benefits or burdens the class of employees it applies to.

Under either the presence or absence of an automatic-contribution arrangement, a participant has a right to choose between unreduced wages and elective deferrals. Likewise, a “right to make each rate of elective contributions” might be unimpaired by the presence or absence of an automatic-contribution arrangement.

So, is an automatic-contribution arrangement a benefit, or a burden?

Ignoring those participants who make an affirmative election (whichever, and whatever it is):

Some might reason that an automatic-contribution arrangement benefits an affected class of employees because it cures a participant’s inattention by selecting what someone supposes is a usually better choice.

Some might reason that an automatic-contribution arrangement burdens an affected class of employees because it imposes on an inattentive participant a choice she does not want.

Some might reason that the presence or absence of an automatic-contribution arrangement is neutral because we cannot know what choice a participant would have made had she been attentive.

And whether an automatic-contribution arrangement is a benefit or burden might vary between the classes of highly- and nonhighly-compensated employee. Some might reason that an automatic-contribution arrangement benefits the affected class of HCEs because many inattentive HCEs are likelier to have wanted to choose deferral over unreduced wages. Yet, some might reason that the same automatic-contribution arrangement burdens the affected class of NHCEs because many inattentive NHCEs are likelier to have wanted to choose unreduced wages over deferrals.

And some might say the measure of a benefit focuses on a participant’s right, not on how she exercises (or fails to exercise) her right.

This is not advice to anyone.