Final rules issued last week by the Internal Revenue Service will aid employers that want to add an automatic enrollment feature to their 401(k) plans without running non-discrimination tests.
However, the rules only apply to two types of automatic enrollment programs: qualified automatic contribution arrangements and eligible automatic contribution arrangements.
Under the rules, employers that meet the specific QACA design requirements are exempt from actual deferral percentage/actual contribution percentage non-discrimination testing. Those tests determine that contributions made by highly compensated employees don't, on average, exceed contributions by lower-paid employees by amounts set by law.
To qualify for the safe harbor from non-discrimination testing, the plan must begin the automatic contributions at 3% of salary, escalating up to 6% adding 1% a year, and provide a company match or non-elective contribution with two-year vesting.
The rules still require that employers offering QACAs automatically enroll all employees. However, employers that offer an EACA may choose to enroll select groups of employees, such as only those employees who are hired on or after a certain date or for non-union employees.
"You can have collectively bargained employees be exempt from automatic enrollment, or only require those employees to enroll and not the others," said Michael Weddell, a principal at Mercer LLC in Detroit. "Under the proposed regulations, this wasn't clear."