Academic journal article Journal of Accountancy

Automatic Enrollment Rules for 401(k) Plans: New Law Aims to Increase Employee Participation

Academic journal article Journal of Accountancy

Automatic Enrollment Rules for 401(k) Plans: New Law Aims to Increase Employee Participation

Article excerpt

Because many Americans are not saving for retirement properly, a primary objective of the recently enacted Pension Protection Act of 2006 was to encourage employee participation in defined contribution plans by facilitating automatic enrollment in IRC sections 401(k) and 403(b) plans. For plan years beginning after 2006, companies can automatically enroll employees in a plan, with a prescribed percentage of the employee's pay automatically withdrawn from each paycheck.

NONDISCRIMINATION

To encourage the use of automatic enrollment, employers that set up such systems (and meet certain rules) do not have to meet nondiscrimination tests that normally apply to employee deferrals and employers' matching contributions. The automatic contribution (stated as a percentage of compensation) must fall within a specified range and be consistently applied to every eligible employee. The employer also must make either a matching or nonelective contribution for each employee not considered "highly compensated." Employer contributions, whether matching or nonelective, must be completely vested after the employee has completed two years of service.

STATE LAW

In the past, a significant barrier to automatic enrollment was that some states prohibited companies from taking automatic deductions from an employee's pay. The 2006 act provides that federal law supersedes any state law that would prohibit or restrict automatic contribution arrangements.

INVESTMENT OPTIONS/FIDUCIARY LIABILITY

Another employer concern has been the fiduciary responsibility and liability for investment of contributions made to a plan through automatic enrollment. A 401(k) plan administrator who chooses the investments for a participant under an automatic enrollment plan has potential liability as a fiduciary. …

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