In Retirement News For Employers, August 20, 2013, the IRS provides guidance on automatic contributions increases. Here is what the IRS said:
Your plan can automatically increase salary deferral contributions for participants if it has or adopts an automatic contribution arrangement (“auto enrollment”) feature. An automatic contribution increase feature can:
— periodically increase the amount employees contribute from their wages to the plan, and
–help employees save more for their retirement.
With an automatic contribution arrangement, you can automatically enroll employees in the plan when they meet the plan’s eligibility requirements and then deduct salary deferrals from their wages. Employees may, however, elect to contribute at a different rate (including zero).
Timing and amount of automatic contribution increases
You have flexibility over when employees’ contributions will automatically increase and by how much, depending on your plan’s type of automatic contribution arrangement.
A basic automatic contribution arrangement has the most flexibility because you may structure the contribution increases to occur at any time, in any amount and based on any definition of compensation. However, your plan must state:
when increases will occur;
the amount of the increase (may have a cap, for example, a maximum contribution rate of 15%); and
the definition of compensation the plan will use for the increase.
An eligible automatic contribution arrangement (“EACA”) gives you about the same flexibility as a basic automatic contribution arrangement, but:
you must inform employees of the timing and amount of automatic contribution increases in an annual notice; and
any contribution increase must meet the uniformity requirement (the increase is the same for all employees, for example, 1%).
Your plan’s EACA may allow employees to request a withdrawal of any automatically contributed amount within 90 days of when automatic contributions were first withheld from their wages.
A qualified automatic contribution arrangement (“QACA”) has similar notice and uniformity requirements as an EACA, but in addition:
contribution increases must meet a minimum schedule of automatic contribution default percentages (starting at 3% and increasing by 1% each year until the default percentage is 6%);
the default percentage cannot be more than 10%; and you must make a minimum level of employer contributions each year.
By meeting all QACA requirements, your plan is exempted from the annual actual deferral percentage and actual contribution percentage nondiscrimination testing requirements. Your plan can include an EACA as well as the QACA so that employees can request a withdrawal of any automatically contributed amount within 90 days of when automatic contributions were first withheld from their wages.
Notice 2009-65 contains two sample amendments you can review and discuss with your benefits advisor to add:
1. a basic automatic contribution arrangement with automatic contribution increases to your 401(k) plan, or
2. an eligible automatic contribution arrangement with automatic increases to your 401(k) plan.