What Is An Eligible Automatic Contribution Arrangement?
To help plan sponsors increase participation in their 401(k) plans, the Pension Protection Act allows an option for sponsors to elect an automatic enrollment feature into their plans.
The automatic enrollment feature requires that an employee would automatically be entered into the plan upon satisfaction of the eligibility requirements at a stated deferral percentage. Such deferral percentages would increase each year, within certain limits. To opt out of the automatic enrollment or to request a different deferral percentage, an employee must notify the employer of his/her decision to decline participation in the plan. Employees must also notify the employer to request a different deferral percentage than the percentage stated by the plan. Under this enrollment feature, participants are allowed a 90-day window of time from the first contribution to reconsider their deferrals and can withdraw these contributions without incurring additional taxes.
This automatic enrollment feature is considered an Eligible Automatic Contribution Arrangement (“EACA”), and can be an effective way for employers to increase participation in their 401(k) plans. Plan sponsors are encouraged to provide training to their employees about the details of automatic contribution arrangements.
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The information contained herein is not necessarily all inclusive, does not constitute legal or any other advice, and should not be relied upon without first consulting with appropriate qualified professionals for your plan’s individual facts and circumstances.
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