3771 / What is an automatic enrollment safe harbor 401(k) plan?

The Pension Protection Act of 2006 created a new safe harbor plan under Section 401(k) called a “qualified automatic contribution arrangement,” available for plan years beginning after 2007.¹

Plans that provide for automatic enrollment and meet certain other requirements for the safe harbor will satisfy the ADP/ACP requirements ( Q 3753, Q 3802) and be excluded from the top heavy requirements ( Q 3916 to Q 3922). For this treatment to apply, a plan must satisfy an automatic deferral requirement, an employer contribution requirement, and a notice requirement.²

The automatic deferral requirement states that each employee eligible to participate in the plan must be treated as having elected to have the employer make elective contributions equal to a “qualified percentage.” The threshold amount of the automatic deferral percentage may not be less than 3 percent for the first year the employee’s deemed election applies. Employees may affirmatively elect out of the plan or elect a different deferral percentage. In the second year, this default percentage must increase to 4 percent, then 5 percent in the third year, and 6 percent in the fourth year and thereafter.³ A plan may provide for a higher percentage so long as it is applied uniformly, although the percentage may not exceed 15 percent. The SECURE Act increased the default percentage from 10 percent to 15 percent for tax years beginning after 2019 for any year after the first plan year when the employee’s compensation is automatically deferred into the plan.⁴ The contributions generally must continue until the last day of the plan year that begins after the date on which the first elective contribution under the automatic deferral requirement is made with respect to the employee.⁵