Many employers invest in their employees’ financial future by offering a 401(k) plan to help them to grow their retirement savings within a shorter period of time. One way employers are proactively engaging their teams in the plan is through automatic enrollment.
Automatic enrollment allows an employer to automatically enroll their employees in the company’s 401(k) plan and select a default deferral, such as 4%, to contribute to their retirement account. This approach can enhance employee participation and kick start retirement savings for employees who may be hesitant to start, or unaware of how to manage a plan.
Overall, automatic enrollment can be a good thing, but employees always have the option to opt out of the plan if they choose. Read on to learn about the advantages automatic enrollment can provide.
Plan Eligibility
401(k) plan sponsors set parameters for automatic enrollment eligibility as a way to increase participation and employee retention. These parameters may be determined by age or length of service, and depending on the plan, may determine which deferrals an employee is qualified for.
For example, a company with no service requirement may get talent in the door, but a company with a company-match structure based on years of service may encourage retention and plan participation.
Three Types of Auto Enrollment
The Internal Revenue Service (IRS) outlines which plans a company can use for automatic enrollment, and each requires written notice, so the employee is aware of deferrals, rules, and regulations of the plan they are enrolled in. These are the three types of auto enrollment plans:
- Basic Automatic Enrollment (ACA): Employees are automatically enrolled in the company’s 401(k) plan, and deferrals will be selected by the employer to get the plan started. The employee, at any time, can choose to increase or decrease their annual contribution or opt-out of the plan completely.
- Eligible Automatic Contribution Arrangement (EACA): EACA plans are similar in structure to ACA plans as it relates to deferrals, but the difference lies in the options employees have once the automatic enrollment has been initiated. With an EACA plan, employees have the option to withdraw any automatic contributions applied to the account within an established timeframe.
- Qualified Automatic Contribution Arrangement (QACA): With a QACA plan, an employer’s automatic deferral will increase each year to help employees save for their future. While a plan may be automatically enrolled with a 3% deferral, over time, it can increase to as much as 10%. A key difference with this type of plan is that employers are required to either match employee contributions or offer non-elective contributions.
Read more about the rules and restrictions associated with each type of automatic enrollment plan through the IRS.
Jump Start Retirement Savings
Offering a 401(k) as part of your benefits package not only makes a statement for your current and future employees, but it also has business advantages as well. Learn more about all of the basics on qualifications, offerings, administration and testing of a 401(k) plan, and their advantages, as an employer today and start offering your employees a better tomorrow.
