While automatic enrollment provisions are attributed with dramatically increasing plan participation, they are known to create a host of compliance issues as well. 

Common Mistake: Failure to Implement Automatic Enrollment Provisions

In plans with automatic enrollment provisions, all eligible employees are automatically assigned the plan’s default contribution rate unless they elect otherwise. Once employees receive the enrollment materials informing them of the automatic enrollment feature, they have two options:

1. Take no action: They are automatically enrolled and will contribute at the default deferral rate.
2. Adjust their contribution amount: This includes the option to contribute nothing.

The most common errors regarding automatic enrollment provisions include:

• Failing to automatically enroll an eligible employee
• Incorrectly excluding an eligible employee
• Failing to properly implement an employee’s deferral election
• Not properly increasing an employee’s deferral election under the automatic escalation provision

If an eligible employee is not automatically enrolled or if their deferral election is not implemented correctly, the employer historically had to make a Qualified Nonelective Contribution (QNEC), equal to 50% of the missed deferral amount, plus earnings. However, now under certain conditions, this QNEC may be reduced or waived entirely under current IRS correction procedures.

Correction Relief Under Rev. Proc. 2021-30

The IRS updated its correction methods for automatic enrollment and escalation errors under Rev. Proc. 2021-30. The updated guidance continues to encourage the adoption of automatic features by reducing or eliminating the required QNEC for early self-correction.

Under Rev. Proc. 2021-30, the QNEC for a missed deferral may be waived entirely if the following conditions are met:

• The failure occurred in a plan with an automatic contribution feature (such as EACA or QACA)
• The missed deferral is corrected by the earlier of:
  • 9½ months after the end of the plan year in which the error occurred, or
  • The first pay period in the second month after the employer is notified of the error.
• Employee notification: The employee must be notified of the error within 45 days of correction.
• Employer match: Missed employer match contributions, plus earnings, must be provided to the employee.

If the 9½-month deadline is missed, a reduced QNEC (typically 25% of the missed deferral) may still apply, provided the error is corrected by the end of the second plan year following the year of the error.

For Assistance with Automatic Enrollment

If you need help, contact Ekon Benefits at (314) 367-6555 or info@ekonbenefits.com.

Straight From the Source

Rev. Proc. 2021-30, Appendix A, Section .05 – https://www.irs.gov/pub/irs-drop/rp-21-30.pdf