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Retirement topics - Automatic enrollment

 

Automatic enrollment allows an employer to automatically deduct elective deferrals from an employee¡¯s wages unless the employee makes an election not to contribute or to contribute a different amount. Any plan that allows elective salary deferrals (such as a 401(k) or SIMPLE IRA plan) can have this feature.

If you¡¯re an employee, your employer must give you the option, before any deferrals are withheld from your wages, to have none withheld or to have a different amount withheld. You may also have the option to withdraw your money within 90 days of the date that the first automatic contribution was made, depending on your employer¡¯s plan.

Types of automatic enrollment

(1) Basic automatic enrollment (automatic contribution arrangement or ACA):

  • Employees are automatically enrolled in the plan unless they elect otherwise
  • Plan document specifies the percentage of wages that will be automatically deducted
  • Employees can elect not to contribute or to contribute a different percentage of pay

(2) Eligible automatic contribution arrangement (EACA):

  • Uniformly applies the plan¡¯s default deferral percentage to all employees after giving them the required notice
  • May allow employees to withdraw automatic contributions, including earnings, within 90 days of the date of the first automatic contribution

(3) Qualified automatic contribution arrangement (QACA):

  • Uniformly applies the plan¡¯s default deferral percentage to all employees after giving them the required notice
  • Meets additional ¡°safe harbor¡± provisions that exempt the plan from annual actual deferral percentage and actual contribution percentage nondiscrimination testing requirements
  • Default deferral percentage starts at 3% and gradually increases to 6% with each year that an employee participates. The default percentage cannot exceed 10%.
  • Required employer contributions. Pick either:
    • matching contribution: 100% match for elective deferrals that do not exceed 1% of compensation, plus 50% match for elective deferrals between 1% and 6% of compensation; or
    • nonelective contribution: 3% of compensation for all participants, including those who choose not to make any elective deferrals.
  • Employees must be 100% vested in the employer¡¯s matching or nonelective contributions after no more than 2 years of service
  • Plan may not distribute any of the required employer contributions due to an employee¡¯s financial hardship

Default investments if employee does not make an election

Employers must choose an investment for employees¡¯ automatically deducted salary deferral contributions. You can limit your liability for plan investment losses by choosing default investments for deferrals that meet certain criteria for transferability and safety, such as a life-cycle fund or balanced funds (). Your employees must be given an opportunity to change the investment choice.

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Page Last Reviewed or Updated: 08-Apr-2025