Category Archives: Automatic Enrollment

Today in ERISA History

March 23, 2009 – The IRS issues Final Regulations on Automatic Contribution Arrangements. Section 902 of the Pension Protection Act of 2006 (PPA ’06) added Code section 401(k)(13), 401(m)(12) and 414(w), providing for automatic enrollment in 401(k), 403(b) and 457(b) plans, including Qualified Automatic Contribution Arrangements (QACA) and Eligible Automatic Contribution Arrangements (EACA). Section 109(b) of the Worker, Retiree, and Employer Recovery Act of 2008 (WRERA) subsequently modified some of the provisions contained in PPA ’06 on automatic contribution arrangements. These regulations contain guidance on how plan sponsors implement automatic contribution arrangements and when employees must be notified.

Model 403(b) Plan Language Released by the IRS includes Auto Enroll Language


When the IRS released the Final 403(b) Regulations earlier this year, they also announced that they would be releasing model plan language, and potentially a model plan itself, for plan sponsors to adopt. In the past, the IRS has released Model amendments and sample amendments, and even suggested plan language for prototype plans contained in the List of Required Modifications (LRMs), but an entire model plan by the IRS was a novel and interesting idea.

With Rev. Proc. 2007-71, the Service has issued model plan language which may be used by public schools to either adopt a written plan which complies with the Final 403(b) Regulations, or to amend an existing plan to comply with the Final 403(b) Regulations. Since the Final 403(b) Regs imposed a written plan requirement, the IRS states that this model plan language is designed to alleviate, in part, the cost to public schools of complying with this requirement. As part of Rev. Proc. 2007-71, the IRS is also requesting comments by March 16, 2008, on these questions:

  • While the model language has generally been prepared for use by employers based on provisions commonly found in defined contribution retirement plans, are there additional provisions which should be added to reflect features that are widely used?
  • Are there changes that should especially be made to reflect the circumstances applicable to public schools, including not only revised versions of the model language, but also whether additional provisions are necessary or appropriate for them?
  • Should the provisions found in section 7.3 of the model language, which have been prepared to satisfy the 2007 final regulations requirements for the plan document to reflect the available vendors, be expanded, including changes to reflect the special relief in section 8 of this revenue procedure?

Section 2.2(b) of the model plan language contains three paragraphs on automatic enrollment which are interesting in both their clarity and brevity. This Revenue Procedure is authored by Bob Architect, the IRS’ authority on all things 403(b), so it is not surprising that the language on automatic enrollment is brief, clear and concise. These paragraphs state:

(b) Special Rule for New Employees. (1) Automatic Enrollment for New Employees. For purposes of applying this Section 2.2, a new Employee is deemed to have elected to become a Participant and to have his or her Compensation reduced by [5%] (and have that amount contributed as an Elective Deferral on his or her behalf), at the time the Employee is hired, and to have agreed to be bound by all the terms and conditions of the Plan. Contributions made under this automatic participation provision shall be made to the Funding Vehicle or Vehicles selected for this purpose for all new Employees by the Administrator. Any Employee who automatically becomes a Participant under this Section 2.2(b) shall file a designation of Beneficiary with the Funding Vehicle or Vehicles to which contributions are made.

(2) Right to File a Different Election; Notice to Employee. This Section 2.2(b) shall not apply to the extent an Employee files an election for a different percentage reduction or elects to have no Compensation reduction, or designates a different Funding Vehicle to receive contributions made on his or her behalf. Any new Employee shall receive a statement at the time he or she is hired that describes the Employee’s rights and obligations under this Section 2.2(b) (including the information in this Section 2.2(b) and identification of how the Employee can file an election or make a designation as described in the preceding sentence, and the refund right under Section 2.2(b)(3), including the specific name and location of the person to whom any such election or designation may be filed), and how the contributions under this Section 2.2(b) will be invested.

(3) Refund of Contributions. An Employee for whom contributions have been automatically made under Section 2.2(b)(1) may elect to withdraw all of the contributions made on his or her behalf under Section 2.2(b)(1), including earnings thereon to the date of the withdrawal. This withdrawal right is available only if the withdrawal election is made within 90 days after the date of the first contribution made under Section 2.2(b)(1).

Note: Section 2.2(b) is an optional provision that provides for any new employee to be automatically enrolled in the Plan, with 5% of Compensation to be contributed to the Plan, unless the employee elects otherwise. See §§ 414(w) and 4979(f) of the Code for special relief that applies to a plan that uses automatic enrollment, as provided in Section 2.2(b). Plan sponsors should make any revisions in this optional provision that may be necessary in order to take into account any additional guidance that may be provided by the Treasury Department or the IRS regarding automatic enrollment under §§ 414(w) and 4979(f) of the Code.

Rev. Proc. 2007-71 states a public school employer who adopts the model language on a word-for-word basis or adopts an amendment which is substantially similar in all material respects will be deemed to satisfy the Final 403(b) Regulations for a written plan and will not need to apply for a private letter ruling. Of course, Rev. Proc. 2007-71 also contains the admonition that the written plan must also be operated in accordance with the written plan or amendment, from or after the effective date of the amendment.

The IRS could not have timed this better. In December, my company will be releasing our 403(b) plan updated for the Final 403(b) Regulations. We will also be releasing a pamplet on this IRS model plan language including annotations and commentary, along with a formatted version of the IRS model plan language.

[tags]Pension Protection Act, ppa, 403(b), 403b, model language, IRS, final 403(b) regs, amendment, Rev Proc 2007-71, ERISA, Bob Architect, Robert Architect[/tags]

QDIA Notice: No Relief in Sight


With the deadline of November 24th to provide the Qualified Default Investment Alternatives (QDIA) Notice fast approaching, neither the Dept. of Labor nor the IRS has announced a last minute extension.

When the DOL released the Final Rule on Default Investment Alternatives Under Participant Directed Individual Account Plans on October 24, 2007, it contained six conditions for fiduciary relief for providing default investments once the fiduciary has met the general fiduciary rules applicable to the selection and monitoring of investment alternatives.

One of those six conditions is that participants and beneficiaries are provided with information concerning the investments which may be made on their behalf in the form of an initial notice and an annual notice. The initial notice is to be provided at least 30 days in advance of the first investment.

The effective date of this Final Rule is December 24, 2007. 30 days in advance of this date means the initial notice is to be provided by November 24, 2007.

The IRS issued the Sample QDIA notice last week, on November 16, 2007. Since the QDIA notice is required for more plans than just plans implementing automatic enrollment arrangements, the buzz since the DOL released the Final Rule on October 24th is that this date would be extended to a more reasonable time frame. As each day passes this week, it is becoming clear that there will probably not be an extension, and initial notices should be provided by November 24th, which is the Saturday after Thanksgiving.

IRS Issues Sample Automatic Enrollment Notice and Default Investment Notice


For plans implementing a qualified automatic contribution arrangement (QACA) or an eligible automatic contribution arrangement (EACA), notice of the arrangement must be provided to employees at least 30 days before the beginning of each plan year.

The IRS has issued a Sample Notice to comply with this requirement. The Service states that the Sample Notice is for a hypothetical QACA which permits EACA withdrawals and contains other assumptions about the underlying plan document, so the notice may need to be modified to meet the actual plan underlying plan provisions before being provided to employees. For example, the Sample Notice assumes the plan permits loans and hardship distributions, so plans without those provisions will need to modify the notice. The IRS also states that this Sample Notice contains text which will satisfy the information requirement for participant notices under the Dept. of Labor’s recently issued Final Rule under ERISA section 404(c)(5) on qualified default investment alternatives (QDIA).

The Sample Notice is very clearly written and should be easy to customize because it provides fill-in-the-blanks for dates and other variable information. The negative about the Sample Notice is that it is a little long at 4 pages and it will be a little difficult to trim it down to a one-page handout printed on both sides of the paper.

[tags]automatic enrollment, sample notice, QACA, EACA, ERISA, IRS[/tags]

Sample Automatic Enrollment Notice

Tom Poje posted a sample Automatic Enrollment notice on Benefitslink.com.

[tags]automatic enrollment, sample notice, QACA, EACA, ERISA[/tags]

QACA: More from the Proposed Automatic Contribution Regulations


Yesterday, the IRS released Proposed Regulations on Automatic Contribution Arrangements. They contain some answers on the new Qualified Automatic Contribution Arrangement (QACA), created last year by Section 902 of the Pension Protection Act.

Does a QACA satisfy the 401(k)(13) safe harbor?

Yes. For plan years beginning on or after January 1, 2008, a cash or deferred arrangement satisfies the ADP safe harbor provision of Code section 401(k)(13) for a plan year if the arrangement is described in paragraph (j) of this section and satisfies the safe harbor contribution requirement of paragraph (k) of this section for the plan year, the notice requirement of paragraph (d) of this section (modified to include the information set forth in paragraph (k)(4) of this section), the plan year requirements of paragraph (e) of this section, and the additional rules of paragraphs (f), (g), and (h) of this section, as applicable. A cash or deferred arrangement that satisfies the requirements of this paragraph is referred to as a qualified automatic contribution arrangement. See Proposed Treas. Reg. 1.401(k)-3(a)(3).

Once a QACA is implemented, can it be discontinued before the end of the plan year and still satisfy the safe harbor ADP requirements?

No. Except as provided in this paragraph (e) or in paragraph (f) of this section, a plan will fail to satisfy the requirements of sections 401(k)(12), 401(k)(13), and this section unless plan provisions that satisfy the rules of this section are adopted before the first day of the plan year and remain in effect for an entire 12-month plan year. See Proposed Treas. Reg. 1.401(k)-3(e)(1).

What is the matching contribution for a QACA?

In applying the requirement of paragraph (c) of this section, in the case of a cash or deferred arrangement described in paragraph (j) of this section, the basic matching formula is modified so that each eligible NHCE must receive the sum of – (i) 100 percent of the employee’s elective contributions that do not exceed 1 percent of the employee’s safe harbor compensation; and (ii) 50 percent of the employee’s elective contributions that exceed 1 percent of the employee’s safe harbor compensation but that do not exceed 6 percent of the employee’s safe harbor compensation. See Proposed Treas. Reg. 1.401(k)-3(k)(2).

What is the vesting requirement of QACA matching contributions?

Any employee who has completed 2 years of service (within the meaning of section 411(a)) has a nonforfeitable right to the account balance attributable to the safe harbor contribution. See Proposed Treas. Reg. 1.401(k)-3(k)(3).

What additional information must be included in the QACA notice provided to employees?

A notice satisfies the additional information requirement of this paragraph (k)(4)(ii) only if it explains – (A) the level of elective contributions which will be made on the employee’s behalf if the employee does not make an affirmative election; (B) the employee’s right under the automatic contribution arrangement to elect not to have elective contributions made on the employee’s behalf (or to elect to have such contributions made in a different amount or percentage of compensation); and (C) how contributions under the automatic contribution arrangement will be invested (including, in the case of an arrangement under which the employee may elect among 2 or more investment options, how contributions made under the automatic contribution arrangement will be invested in the absence of an investment election by the employee).

If the plan sponsor wants to implement a QACA, and some participants have made affirmative elections not to defer or to defer at a different rate than the QACA, does the QACA fail unless the current employees are automatically enrolled at the QACA rates?

No. An automatic contribution arrangement will not fail to be a QACA merely because the default election provided under Proposed Treas. Reg. 1.401(k)-3(j)(1)(i) of this section is not applied to an employee who was an eligible employee under the cash or deferred arrangement (or a predecessor arrangement) immediately prior to the effective date of the QACA and on that effective date has an affirmative election in effect (that remains in effect) to (A) have elective contributions made on his or her behalf (in a specified amount or percentage of compensation); or (B) not have elective contributions made on his or her behalf. Proposed Treas. Reg. 1.401(k)-3(j)(1)(iii).

Does the uniformity requirement for a QACA mean that all employees must defer at the same percentage?

No. Under section 401(k)(13)(C)(iii), the qualified percentage must be applied uniformly to all eligible employees. The proposed regulations would provide that a plan does not fail this requirement merely because the percentage varies for the following reasons: (1) the percentage varies based on the number of years an eligible employee has participated in the automatic contribution arrangement intended to be a QACA; (2) the rate of elective contributions under a cash or deferred election that is in effect on the effective date of the default percentage under the QACA is not reduced; or (3) the amount of elective contributions is limited so as not to exceed the limits of sections 401(a)(17), 402(g) (determined with or without catch-up contributions described in section 402(g)(1)(C) or section 402(g)(7)) or 415. See pages 12-13 of preamble to the Proposed Regulations.

Can any forfeitures resulting from the withdrawal of deferrals made pursuant to a QACA revert to the employer?

No. In the case of any withdrawal made under paragraph (c) of this section, employer matching contributions with respect to the amount withdrawn must be forfeited. See Proposed Treas. Reg. 1.414(w)-1(d)(2). An employer matching contribution with respect to the default elective contribution distributed pursuant to section 414(w) must be forfeited. The forfeited matching contribution is not a mistaken contribution or other erroneous contribution, and, thus, it cannot be returned to the employer (or be distributed to the employee as is permitted for an excess aggregate contribution). The proposed regulations would provide that the forfeited contribution must remain in the plan and be treated in the same manner under the plan terms as any other forfeiture under the plan. See page 17 of the preamble to the Proposed Regulations.

Additional Information:

[tags]Pension Protection Act, automatic enrollment, QACA, EACA, ACA, IRS, proposed regulations, 414(w), elective deferrals, benefitslink, ERISA[/tags]

T-Minus 22 Days and Counting: Implementing Automatic Enrollment for 2008


The proposed regulations for automatic enrollment arrangements are out, and the clock is ticking.

For calendar year plans implementing a qualified automatic contribution arrangement (QACA) or an eligible automatic contribution arrangement (EACA) beginning on January 1, 2008, the time period for providing employees with notice of the QACA or EACA ends on December 1, 2008.

When I need to understand regulations quickly, I will write a quick FAQ to organize the language of the key provisions into a Q&A format to help me understand them. This is part of my quick FAQ about the new Proposed Regulations on Automatic Contribution Arrangements, just released by the IRS today, covering the provisions on eligible automatic contribution arrangements (EACAs). Tomorrow, I will share my quick FAQ on qualified automatic contribution arrangements (QACAs).

What is an automatic contribution arrangement (ACA)?

An automatic contribution arrangement is a cash or deferred arrangement within the meaning of section 1.401(k)-1(a)(2) that provides that in the absence of an eligible employee’s affirmative election, a default applies under which the employee is treated as having made an election to have a specified contribution made on his or her behalf under the plan. Proposed Treas. Reg. 1.401(k)-3(j)(1)(ii).

What is an eligible automatic contribution arrangement (EACA)?

An eligible automatic contribution arrangement is an automatic contribution arrangement under an applicable employer plan that, for the plan year, satisfies the uniformity requirement under Proposed Treas. Reg. 1.414(w)-1(b)(2), the notice requirement under Proposed Treas. Reg. 1.414(w)-1(b)(3), and the default investment requirement under Proposed Treas. Reg. 1.414(w)-1(b)(4).

What is the uniformity requirement for EACAs?

The uniformity requirement under Proposed Treas. Reg. 1.414(w)-1(b)(2) is that an eligible automatic contribution arrangement must provide that the default elective contribution is a uniform percentage of compensation. An arrangement does not violate the uniformity requirement merely because the percentage varies in a manner that is permitted under Treas. Reg. 1.401(k)-3(j)(2)(iii), except that the rules of Treas. Reg. 1.401(k)-3(j)(2)(iii)(A) and 1.401(k)-3(j)(2)(iii)(B) are applied without regard to whether the arrangement is intended to be a QACA. See Proposed Treas. Reg. 1.414(w)-1(b)(2). The preamble to the proposed regs state that the cash or deferred arrangement does not fail to satisfy the uniformity requirement merely because an employee is not automatically enrolled during a period that the employee is not permitted to make elective contributions because of the requirement to suspend elective contributions for a 6-month period following a hardship distribution. See page 11 of the proposed regs.

Can the notice for the EACA be distributed electronically?

The notice must be in writing, however, see Treas. Reg. 1.401(a)-21 for rules permitting the use of electronic media to provide applicable notices. Proposed Treas. Reg. 1.414(w)-1(b)(3)(i). See Proposed Treas. Reg. 1.414(w)-3(b)(3)(i).

What information must be included in the notice for the EACA?

The notice must include the provisions found in Treas. Reg. 1.401(k)-3(d)(2)(ii) to the extent those provisions apply to the arrangement. A notice is not considered sufficiently accurate and comprehensive unless the notice accurately describes – (A) the level of elective contributions which will be made on the employee’s behalf if the employee does not make an affirmative election; (B) the employee’s rights to elect not to have default elective contributions made to the plan on his or her behalf or to have a different percentage of compensation or amount of elective contributions made to the plan on his or her behalf; (C) how contributions made under the arrangement will be invested in the absence of any investment election by the employee; and (D) the employee’s rights to make a permissible withdrawal, if applicable, and the procedures to elect such a withdrawal.

When must current employees be provided with notice of the EACA?

The timing requirement of Proposed Treas. Reg. 1.414(w)-3(b)(3)(iii) is satisfied if the notice is provided within a reasonable period before the beginning of each plan year (or, in the year an employee becomes an eligible employee, within a reasonable period before the employee becomes an eligible employee). In addition, a notice satisfies the timing requirements of Proposed Treas. Reg. 1.414(w)-3(b)(3) only if it is provided sufficiently early so that the employee has a reasonable period of time after receipt of the notice and before the first elective contribution is made under the arrangement to make the election described under paragraph (b)(ii)(A) of this section. This timing requirement is satisfied if the notice is provided to each eligible employee at least 30 days and no more than 90 days before the beginning of each plan year. See Proposed Treas. Reg. 1.414(w)-1(b)(3)(iii)(B).

When must new employees be provided with notice of the EACA?

If an employee does not receive the notice at least 30 days and no more than 90 days before the beginning of the plan year because the employee becomes eligible after the 90th day before the beginning of the plan year, the timing requirement is deemed to be satisfied if the notice is provided no more than 90 days before the employee becomes an eligible employee (and no later than the date the employee becomes an eligible employee). See Proposed Treas. Reg. 1.414(w)-1(b)(3)(iii)(B).

Can an employee become automatically enrolled if they make an affirmative election to make no deferral or make an affirmative election to defer a different amount?

No. Proposed Treas. Reg. 1.401(k)-3(j)(1)(ii) states that the default election ceases to apply with respect to an eligible employee if the employee makes an affirmative election (that remains in effect) to (A) have elective contributions made in a different amount on his or her behalf (in a specified amount or percentage of compensation); or (B) not have any election contributions made on his or her behalf.

If an employee becomes automatically enrolled due to an EACA, and does not want to be automatically enrolled, when can the employee take a distribution of the amount withheld pursuant to the EACA?

Sections 414(w)(1) and 414(w)(2) provide that an applicable employer plan that contains an EACA is permitted to allow employees to elect to receive a distribution equal to the amount of elective contributions (and attributable earnings) made with respect to the employee beginning with the first payroll period to which the eligible automatic contribution arrangement applies to the employee and ending with the effective date of the election. The election must be made within 90 days after the date of the first elective contribution with respect to the employee under the arrangement. Section 414(w)(1)(A) and 414(w)(1)(B) provide that the amount of the distribution is includible in gross income for the taxable year in which the distribution is made, but is not subject to the additional income tax under section 72(t). See page 7 of preamble to the proposed regulations. See page 18 of preamble to Proposed Regulations.

Does the 90-day withdrawal period start before January 1, 2008, so that for an automatic contribution arrangement implemented on or after October 1, 2007, the 90-day withdrawal window ends immediately after the January 1, 2008, EACA implementation date?

No. Under section 414(w)(2)(B), the election to withdraw the contributions that were made under an EACA must be made within 90 days of the “first elective contribution with respect to the employee under the arrangement.” The proposed regulations would define the arrangement for this purpose as the EACA so that the withdrawal option could apply to employees previously eligible under the CODA (including a CODA that is an automatic contribution arrangement but was not an EACA). Because section 414(w) only applies to plan years beginning on or after January 1, 2008, an automatic contribution arrangement can only become an EACA on or after that date. Accordingly, a withdrawal election under 414(w) can only apply to elective contributions made after that date. The proposed regulations would provide that the 90-day window for making the withdrawal election begins on the date on which the compensation that is subject to the cash or deferred election would otherwise have been included in gross income. In addition, the proposed regulations would provide that the effective date of the election must be no later than the last day of the payroll period that begins after the date of the election.

What is the correction period for excess contributions and excess aggregate contributions under an EACA?

6 months. Section 4979 provides an excise tax on excess contributions (within the meaning of section 401(k)(8)(B)) and excess aggregate contributions (within the meaning of section 401(m)(6)(B)) not distributed within 2 1/2 months after the close of the plan year for which the contributions are made. Section 902 of PPA ’06 amended section 4979 to lengthen this 2 1/2 month correction period for excess contributions and excess aggregate contributions under an EACA to 6 months. Thus, in the case of an EACA, the section 4979 excise tax does not apply to any excess contributions or excess aggregate contributions which, together with income allocable to the contributions, are distributed or forfeited (if forfeitable) within six months after the close of the plan year. See page 9 of the preamble to the Proposed Regulations.

I will be consolidating my notes and posting it in a PDF, probably on Friday. (hat tip to BenefitsLink.com for the copy of the proposed regs)

[tags]Pension Protection Act, automatic enrollment, QACA, EACA, ACA, IRS, proposed regulations, 414(w), elective deferrals, benefitslink, ERISA[/tags]

Comments on PPA Technical Corrections Bill Requested

The House Ways and Means Committee is requesting comments on H.R. 3361, which is the House bill containing technical corrections to the Pension Protection Act.

Comments will be accepted until the close of business on November 1st and can be submitted by email following the procedures posted in the announcement for comments.

Technical corrections in tax geek speak means correcting typos, punctuation errors, and errors in Code section references. H.R. 3361 is worth reading and commenting on because, in some areas, it goes beyond technical corrections into making actual changes. The statement requesting comments by the House Ways and Means Committee characterizes H.R. 3361 as correcting the Pension Protection Act so that it reflects Congress’ original intent. For example, the provision on rollovers to nonspouse beneficiaries was originally to be mandatory. Then the IRS interpreted this section of PPA as not mandatory. H.R. 3361 makes rollovers to nonspouse beneficiaries a mandatory change again.

One of the interesting changes in H.R. 3361 is the change to Eligible Automatic Contribution Arrangements (EACAs), contained in Section 902 of the Pension Protection Act. The changes made by H.R. 3361 are as follows:

    ‘‘(3) ELIGIBLE AUTOMATIC CONTRIBUTION ARRANGEMENT.—
    For purposes of this subsection, the term ‘eligible automatic contribution arrangement’ means an arrangement under an applicable employer plan—
      ‘‘(A) under which a participant may elect to have the employer make payments as contributions under the plan on behalf of the participant, or to the participant directly in cash,
      ‘‘(B) under which the participant is treated as having elected to have the employer make such contributions in an amount equal to a uniform percentage of compensation provided under the plan until the participant specifically elects not to have such contributions made (or specifically elects to have such contributions made at a different percentage), and
      ‘‘(C) under which, in the absence of an investment election by the participant, contributions described in subparagraph (B) are invested in accordance with regulations prescribed by the Secretary of Labor under section 404(c)(5) of the Employee Retirement Income Security Act of 1974, and
      ‘‘(D) which meets the requirements of paragraph (4).”

H.R. 3361 says to strike subparagraph (C) and redesign subparagraph (D) as subparagraph (C) but it does not contain the specific language to redesign subparagraph (D), which is a little unusual. Before the bill is close to becoming enacted as a law, it should contain the actual language changes to the Internal Revenue Code.

Look for more information as this bill matures and moves closer to passage. It is still possible that this bill may become law before the end of this year.

[tags]Pension Protection Act, ppa, pension, HR 3361, technical corrections, automatic enrollment, EACA, employee benefits, ERISA[/tags]

Automatic Enrollment Expected to be Popular

Yesterday, the Wall Street Journal published an article about how businesses are jumping on the automatic enrollment bandwagon. In “Auto Enroll Retirement Plans Take Off”, Jillian Mincer reports that, in 2006, Fidelity experienced a 95% increase in automatic enrollment in plans it administers. (hat tip to the National Center for Policy Analysis.)

Even though automatic enrollment has been around for a number of years, the Pension Protection Act made automatic enrollment more attractive. Section 904 of PPA contains the new safe harbor automatic enrollment provisions, known as a qualified automatic enrollment arrangement (QACA). What makes automatic enrollment so attractive now is that if the employer sponsoring the plan implements the QACA provisions, the employer does not need to meet certain nondiscrimination requirements, including the ADP test.

[tags]automatic enrollment, pension protection act, PPA, QACA, ADP, participant, plan sponsor, plan document, pension, retirement, ERISA[/tags]

Automatic IRA Act of 2007

With the introduction of the Automatic IRA Act of 2007, S. 1141, automatic IRAs have become a topic of conversation again. The Automatic IRA is not a new idea – Congress has seen bills containing automatic IRA provisions in the past. Automatic enrollment in 401(k) plans is not a new idea either. Before the Pension Protection Act, sponsoring employers could automatically enroll employees into their 401(k) plans. PPA just added some important provisions which make automatic enrollment much more attractive, including eliminating state law concerns, providing for a safe harbor, allowing for automatic increases in the deferral rate, and provisions on investing the automatic contributions when the participant fails to provide investment instructions.

Automatic IRAs extend this trend one step further by permitting employees without access to a plan to defer into an Automatic IRA. The concept is the same as Automatic Enrollment in 401(k) plans but the deferral limit is much lower – $4,000 permitted into the IRA compared to $15,500 this year for a 401(k) plan. If the Automatic IRA Act of 2007 burdens the employer with setting up the IRAs, changing the payroll selections, and selecting the investment funds for the employee if they provide no investment instructions, the request by an employee to set up an IRA should make the employer consider whether a 401(k) plan with automatic enrollment is a better choice. Especially if the employer has been avoiding offering a retirement plan to employees because of concern over the time and expense of administering any type of plan. [tags]Pension Protection Act, automatic IRA, individual retirement account, IRA, automatic enrollment, 401(k), retirement, pension, ppa[/tags]