Plan admin basics: automatic enrollment

The Pension Protection Act paved the way for automatic enrollment and annual increase programs in 401(k) and 403(b) plans

The Pension Protection Act of 2006 (PPA) authorized and expanded existing, basic automatic enrollment arrangements—clearing some potential legal and administrative barriers, and establishing incentives for employers to implement such plan features. By doing so, the PPA enabled employers to make it easier for employees to participate in their workplace retirement plan, as well as contribute to it and increase their savings rates over time. In fact, 87% of employees participate in plans with automatic enrollment, compared to just 52% participation for plans without this feature.1

The PPA paved the way for three types of automatic enrollment features:

Automatic Contribution Arrangement (ACA)
ACA is a plan feature that allows for employees, who are eligible to participate in a plan but fail to make a salary deferral election, to be automatically enrolled in the plan and have a predetermined percentage of their compensation deferred. Up-front and annual notices are required to let employees know they will be automatically enrolled in the plan, the percentage of pay, and to which investment options the contributions will be directed in the absence of an investment election. These notices also advise employees of their right not to defer or to defer at a different percentage of pay.

In addition to the basic ACA, an employer can choose an eligible automatic contribution arrangement (EACA) or a qualified automatic contribution arrangement (QACA).

Eligible Automatic Contribution Arrangement (EACA)
An EACA is like the basic automatic contribution arrangement, with a few additional requirements related to the content of the initial and annual participant notices and default contribution rate. There are two potential advantages to meeting the EACA requirements. First, the plan has the option to extend the window to correct failed Average Deferral Percentage (ADP) or Average Contribution Percentage (ACP) tests from two-and-a-half to six months after the close of the plan year, while still avoiding the 10% employer excise tax. Also, a plan can (but is not required to) allow for automatically enrolled participants to withdraw their contributions within the time stated in the plan (within 90 days of the first contribution).

Qualified Automatic Contribution Arrangement (QACA)
A QACA allows a plan to satisfy the ADP test, as well as to potentially satisfy the ACP and top-heavy tests. The QACA design is essentially a variation of the traditional safe harbor 401(k) or 403(b) plan. The plan must include certain features—such as minimum automatic deferral percentages and increases, mandatory minimum employer contributions, and a special vesting schedule. The initial and annual notices contain the same information as the EACA notice, along with the general requirements of a traditional 401(k)/403(b) safe harbor notice.

Want to dig a little deeper?
Both the Internal Revenue Service (IRS) and Department of Labor (DOL) have some helpful resources:

If you have any questions, please contact your Fidelity representative.

1Data based on Fidelity analysis of book of business corporate DC plans (including advisor-sold DC) and participants as of 12/31/2020

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