Automatic Enrollment Rules |
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May 12, 2004 |
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The IRS recently released a general information letter addressing — and generally enhancing — automatic enrollment rules for 401(k) and 403(b) plans. Automatic enrollment is a plan design method approved in 1998 by the IRS under which a new plan participant is deemed to have made a deferral election of a stated percentage of compensation under the terms of the plan document (unless an affirmative election of a different amount, including zero has been made). A follow-up Revenue Ruling 2000-8, released in 2000, also permitted a plan to apply automatic enrollment provisions to current plan participants who are making elective deferrals under the minimum threshold stated in the plan document on an annual basis. The General Information Letter (click here to view) expands and clarifies the application of the automatic enrollment rules as follows: |
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| A. | The percentage selected in the plan document may be any amount that is otherwise permitted under the terms of the plan (thus, it is not limited to the 3% maximum stated in Revenue Ruling 98-30). |
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| B. | The plan may provide a schedule of automatic deferrals that will change over time.
Example: 3% for the initial 5 years of participation and 5% thereafter. |
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| C. | The application of the percentage will automatically apply to compensation increases including raises and bonuses). |
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| In all cases the plan document (including the summary plan description) must clearly state and explain the automatic enrollment rules including the option to totally elect out of deferring into the plan. |
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