Auto enrollment is becoming more popular with employers that sponsor defined contribution (DC) plans. This feature can help increase plan participation, enhance retirement outcomes among participants, and improve discrimination testing results. On the other hand, administrative oversights can prove costly.
In this article, Milliman’s Kari Jakobe identifies two common errors administrators commit related to auto enrollment. She also provides two examples showing the monetary effects that result from these mistakes.
Here is an excerpt from the article:
The two most common failures for auto enrollment plans are: 1) failure to notify employees of the plan provision, and 2) failure to enact the auto enrollment and withhold deferrals on a timely basis, or at all. These failures nearly always result from bad data—incorrect date of hire on a payroll file, for example, a miscoded rehire, or a keying error when entering deferral changes into a payroll system. The possibilities are numerous and the corrections can be costly.
In general, the Internal Revenue Service (IRS) has prescribed corrective action for missed deferrals with less than nine months remaining in the year, requiring the plan sponsor to deposit:
• 50% of missed deferrals
• 100% of missed match
• Earnings at a reasonable interest rate
Consider the scenario shown in Figure 1 of missed deferrals that are due to failure to start the withholding on a timely basis, for a client with a 4% auto enrollment rate and a match formula of 100% up to a maximum of 6% deferred.
The full correction of $8,937.00 is funded by the employer (not the employee) in the form of a qualified non-elective contribution (QNEC). That means the money is 100% vested immediately and does not count against the 402(g) limit for the participant. Most plan sponsors will choose to communicate the specifics about these corrections via correspondence letters to the affected participants and should be prepared to field an array of resulting questions.