Automatic Enrollment Retirement Plans

For most employees, retirement is an ultimate goal, but knowing when and how much to contribute can be difficult. Thanks to the Pension Protection Act of 2006, you (as an employer) can automatically enroll employees into your retirement plan. They'll be enrolled unless they affirmatively elect otherwise in a retirement plan that allows elective deferrals. This can potentially help them reach their retirement savings goals.

Types of automatic enrollment

The IRS has 3 types of automatic enrollment plans.¹

Automatic contribution arrangement (ACA)

Employees are automatically enrolled, unless they choose otherwise
Your plan document specifies the percentage of compensation which will be automatically deducted and contributed to the plan
Employees can contribute a different percentage of their compensation, or opt out altogether

Eligible automatic contribution arrangement (EACA)

Uniformly applies your plan’s default deferral percentage to all employees after giving them the required notice
May allow automatic withdrawal of employee contributions, including earnings, within 90 days of the date of the first automatic contribution
Employees can contribute a different percentage of their compensation, or opt out altogether

Qualified automatic contribution arrangement (QACA)

Uniformly applies your plan’s default deferral percentage to all employees after giving them the required notice
Meets additional “safe harbor” provisions that exempt the plan form the annual non-discrimination requirements
The default deferral percentage starts at 3% and gradually increases to 6% with each year the employee participates. This percentage cannot exceed 10%.
Employees must be 100% vested in your matching or non-elective contribution after no more than 2 years of service
Your plan may not distribute any of the required employer contributions because of an employee’s financial hardship
Employees can contribute a different percentage of their compensation, or opt out altogether

A QACA requires an employer contribution of one of the following:

A matching contribution of 100% of the first 1%, and 50% of the next 5% of compensation
A non-elective contribution of 3% of compensation of all participants, including those who chose not to defer

Default investments if an employee does not make an election

You must choose an investment for your employees' automatic contributions. You can limit your liability for plan investment losses by choosing a qualified default investment alternative (QDIA) which satisfies the conditions under ERISA Section 404(c)(5). Types of alternatives allowed under a QDIA are: