the agony and ecstasy of automatic enrollment - … asppa annual material… · the agony and...
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The Agony and Ecstasy of Automatic EnrollmentRobert M. Kaplan, CPC, QPA, CFP, APA
Director of Technical Education
The American Retirement Association
How Big an Issue is Auto Enrollment?
2017 PlanSponsor DC Survey indicates
41.7% of 401(k) plan auto enroll (including 24.8% in the micro-market – under $5 MM)
Most common rate is 3% (40.9% of plans)
39.7% use GREATER than 3%
Participation Rates
78% for all plans
90% for Auto Enroll
63% for Traditional Enrollment
Per 2016 Vanguard Group Center for Investment Research
Increased Participation
Testing results improve
More employees saving for retirement
Help create a “healthy” plan
Considerations
Cost
Increased administration
Low average account balances
Budget for match
More distributions in high turnover companies
Considerations
Can HR implement timely?
Do Payroll Company and Record Keeper have access to information timely?
Considerations
Am I setting myself up to fail?
Notice requirements (to be discussed later)
How do I identify auto enrolled employees in a plan (especially a takeover)
Penalty for failure to provide notices
Auto Escalation
Once in the plan – will the participant increase deferrals?
Many do not
Plan design to increase at a specific point in time may help
Auto Escalation
Just what you wanted – more stats!!!
2017 PlanSponsor DC Survey
35.3% use Auto Escalation
Only 15.3% in the micro-market
Re-Enrollment
Just what you wanted – yes, even more stats!!!
2017 PlanSponsor DC Survey
12.6% use re-enrollment
8.6% for those not participating
4.0% for those not at default rate
The Good and the Bad News
Obviously many are deferring who weren’t participating before
Would those defaulted (example 3%) have actively enrolled at a higher rate
Auto enroll is generally limited to new hires
The Good and the Bad News
When I change employers do I resume where I left off or get re-enrolled at a lower rate?
Industry stats indicate that 6% auto enroll has the same success rate as 3% (employees who do not lower or opt out)
Strategies
When recommending – get input from all parties (HR, payroll and record keeper)
Design entry date that works for all
Immediate entry may be problematic
How about 1 month
Strategies
Document flow of information for new employees and changes
Do I know when a participant has affirmatively elected an amount or has been defaulted (this could impact disclosures and re-enrollment)
Strategies
How will we deal with those that later decide – “I did not know, I did not understand, you never told me, etc….”
EACA –to be discussed later
Will Plan Administrator (HR) handle
Plan Design Options
• ACA
• QACA = Qualified Automatic Contribution Arrangements
• EACA = Eligible Automatic Contribution Arrangements
Types of ACAs
• ACA is any arrangement that does not qualify as an EACA or QACA
• Will become clearer after we define those two types
QACA
• Safe Harbor Plan
• Tax Code Section §401(k)(13)
• Eliminates ADP/ACP testing
• Avoids Top Heavy
• Note: Most provisions are the same as the current SH under §401(k)(12)
QACA Requirements
• Automatic Deferral (of course)
• Option to opt out
• Notice Requirements
• Deferral Percentages
• SH Employer Contributions
QACA Requirements
• As indicated earlier, most of the provisions of the Regulations match the existing SH rules
– Example:• Plan must be amended PRIOR to the beginning of the PY
• QACA must be in place for 12 month period
• Plan may limit deferrals as long as maximum match can still be achieved by NHCEs
QACA Deferral Rules• Applies to all employees without an affirmative
election in place (cannot exclude existing employees or participants)
– Employees must opt out or elect a different percentage
– If an employee had an election in a CODA prior to the effective date of the QACA, then it counts as an affirmative election
– Plan can set an expiration date for elections (so employee has to re-elect)
Uniformity Requirement
• Default deferral must be uniformly applied, with these exceptions:
– Years of QACA participation
– Affirmative election on file
– Hardship withdrawal required suspension
– Contribution or deferral limits have been met
Minimum Deferral %
• Initial period is 3%
• Initial period can last until the end of the year FOLLOWING the year of eligibility
– Can be as long as two full years
Minimum Deferral %
• Period # 2 = 4%
• Period #3 = 5%
• Period #4 = 6%
• Subsequent years = 6%
Minimum Deferral %• May provide a larger % at each level
• May not exceed 10% at any level
• Note: Hardship suspensions must recommence at level prior to withdrawal
Minimum Deferral % Example• Provide 6% from Day 1
– Can leave
– Can increase in any year (but not to greater than 10%)
Minimum Deferral % Example
• Provide 4% from Day 1
– Can leave at 4% for second period
– Must increase to 5% in third period and 6% in 4th
period (but not to greater than 10%)
Employer SH Contributions• 3% nonelective
Or
Employer SH Contributions
• Matching Contribs$ for $ on first 1%, and
50 cents on dollar for next 5%
Total 3.5%
Note: Can be a greater match
Cannot increase match % as rate of deferral increases
Employer SH Contributions
• Fully vested after 2 years (not ASAP)
• Subject to in-service withdrawal restrictions
• Remember other SH rules
– Can’t match in excess of 6%
– Discretionary match cannot exceed 4%
– Can’t have higher rate for HCE
Required Notice
• Timing:
– Reasonable period
– 30-90 deemed to be reasonable
– Date of Hire for immediate eligibility plans
Required Notice
• Content:
– Current SH content, plus• Level of default deferrals
• Right to change deferral %
• Default investment account, if applicable
• May combine notices (EACA, QDIA)
Required Notice
• Delivery method:
– To each employee (not posted)
– Electronic is allowed• Directly to participant
• No kiosk or posting on website
Required Notice
• Whoops, I forgot
– Max of $1,100 per day per failure
EACA Requirements
• Option to opt out
• Automatic deferral
• Uniformity (as discussed earlier)
• Notice requirements
EACA Incentives• Permissive withdrawals
• 6 month ADP/ACP corrections
Permissive Withdrawal
• 90 days
– Starts on day the first deferral would have been included in pay
• No definitive distribution date
– Administratively feasible???
Permissive Withdrawal• All or nothing at all (all deferrals must be
withdrawn, not just some)
• Earnings (gains/losses)
• Forfeit match (and earnings)
– Do not return to Employer
Permissive Withdrawal
• Taxation
– No 10% penalty
– Income in year
distributed
– No rollover
– No consent
Permissive Withdrawal
• Distribution Fees
– Yes
– Cannot differ from ordinary distribution fee
Permissive Withdrawal• Optional provision
• Must be in document and notice
Permissive Withdrawal
• Testing
– Exclude
– Wait to run tests AFTER 90 days
Permissive Withdrawal• Testing Corrections
– 6 months to correct (to avoid 10% penalty)– 10% is from 6 to 12 months– After 12 months – EPCRS
• Note: If EACA rules do not apply to all plan participants (for example only newly eligible) then the 6 month testing rule does not apply
EACA Notice
• Similar to QACA
• Timing rules the same
EACA Notice Content
• SH, plus
• Default %
• Ability to change
• QDIA, if applicable
• Permissive withdrawal, if applicable
QACA/EACA
• If a plan has wants both the QACA and EACA provisions it needs to provide for all language
– Example – QACA may not allow permissive withdrawal unless it has proper EACA language in document
I will be happy to answer any questions on Auto Enrollment issues.
Thank You.
Questions
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