Now is the time to auto-enroll in retirement savings

“Automatic enrollment.”

Does this phrase trigger dreams of employees realizing their retirement goals through behavioral nudges? Or does it inspire night terrors of missed enrollments and employees crying out to give their money back?

Getting eligible employees to participate in a retirement plan by default can truly help them get on the right track for their financial future. Auto-enrollment makes saving for retirement the path of least resistance, and reinforces the concept that this behavior is expected. (It also can benefit highly-paid employees by raising the average savings rate, increasing the likelihood of passing annual testing without requiring employers to contribute if they don’t have the budget.)

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We know it’s good for us — so how can we explain the ongoing hesitation? Top concerns around auto-enrollment include missing people who are supposed to be eligible, and therefore, requiring correction at a cost to the employer and bringing in uninterested employees, which requires additional administrative time.

Two key acronyms should help quell those fears: EPCRS and EACA.

EPCRS is the IRS Employee Plans Compliance Resolution System, which lays out numerous methods to correct common errors when administering retirement plans. In the most recent version, Revenue Procedure 2021-30, the IRS extended certain safe harbors that promote monitoring for administration errors in automatic enrollment for swift resolution. This is done by allowing for the avoidance of employer contributions when certain conditions are met.

An important note around using EPCRS: The Self Correction Program that allows plan sponsors to bypass the IRS proactively requires that the administrator have “established practices and procedures (formal or informal) designed to promote and enable compliance.” When working through corrections, it’s important to review current processes and document whether these need upgrades to avoid future misses, or if there was a unique situation that caused the error.

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Now, let’s examine the correction process around missed automatic enrollments. Assuming there are standard practices in place to administer the plan and automatic enrollment provisions, consider the following scenario. Your client’s HR and finance team notices that employees recently eligible don’t seem to have their 401(k) savings rate set up in payroll, or an employee asks why he or she was never enrolled like the notice stated.

The steps below assume errors before December 31, 2023, when the current auto-enroll safe harbors in EPCRS expire.

First, review the employee roster to determine who entered the plan recently and the total population that weren’t set up with their default or elected savings rates, then update payroll with missing deduction rates. Finally, review the timing of getting on track: did the clock stop as of the earlier of: October 15th of the year after the initial missed deferral setup; or the first pay date in the 2nd month being alerted to the miss? (For example, if payroll has semi-monthly payroll on the 15th and last business day, and were alerted to the miss on May 8th, this deadline is July 15th.

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From there, provide required notice to impacted employees within 45 days of stopping the clock.EPCRS describes the notice content requirement, which is essentially informing employees what happened when deductions commenced, and that they have the opportunity to increase deferrals to make up for lost time.

If your client meets the above actions, then they can bypass the required contribution for missing the initial setup of employee deferrals. An employer deposit still may be due if a match is provided at a rate the employees would have received without the setup error. It’s not an added cost; just the normal expected company match. Knowing that employees are saving as intended and an added employer cost wasn’t incurred will help your client breathe easier. Be sure that they review processes to avoid this in the future.

Your plan can include permissible withdrawals, which allows employees to ask for their default contributions back in the first 30-90 days. These distributions are not subject to IRS 10% early withdrawal penalties, so automatic enrollment doesn’t have to feel punitive to employees who were not paying close enough attention before their deductions were set for them.

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If included in your client’s plan document, an eligible automatic enrollment arrangement, or an EACA, is an added layer to automatic enrollment that comes with a few requirements but great benefits. It generally can only be added and removed at the beginning of a plan year. EACA provisions also include annual notice requirements, but not more onerous than other annual notices that service providers assist with (i.e., QDIAs, safe harbors). Benefits include an extended testing window for ADP testing (increased to 6 months from 2-½) to avoid refund penalties and permissible withdrawals for employees.

Now’s the time to talk to service providers about your options, and be sure to ask: Do they offer EACA permissible withdrawals if automatic enrollment is set up? What is the process for employees to get their money back, and does it relieve pressure and effort for the HR team? What reporting can be provided to help assess automatic enrollment setups staying on track?

Do they have a sample notification template and/or assist with the notification process if there’s an administrative error to avoid added employer contributions?

If you’ve been on the fence about automatic enrollment, hopefully realizing that pain points can be minimized will help move you toward helping employees meet retirement goals more easily.