One of the more intriguing questions regarding automatic enrollment of employees in 401(k) plans is how the employees will react to their employer removing funds from their paycheck. To answer that question, Harris Interactive conducted a study for Retirement Made Simpler, a coalition formed by the AARP, the Financial Industry Regulatory Authority (FINRA), and the Retirement Security Project (RSP). To conduct the study, Harris made telephone contact with 10,130 adults between September and October of 2007. Of this group, 646 were automatically and currently enrolled in their employer’s 401(k) plan, and 48 had opted out of automatic enrollment.

Surprisingly, the study found that 98 percent currently enrolled in an automatic 401(k) plan agree that “they are glad their companies offer this savings vehicle, with nearly four in five (79%) of them expressing strong agreement.” It noted that only seven percent had opted out of the plan. Ninety-five percent of the participants in these plans agreed that automatic enrollment had made saving for retirement “easy,” and 85 percent agreed that automatic enrollment had helped them start saving for retirement earlier than they had planned.

According to the RSP, companies that use automatic enrollment provisions in their 401(k) plans commonly see employee participant rates soar to between 85 and 95 percent, boosting participant especially among lower-income and minority workers, who typically have lower participation rates.

To assist 401(k) plan sponsors, the IRS has added a feature to its web site that identifies
11 common errors regarding 401(k) Plans. (The page can be accessed at http://www.irs.gov/pub/irs-tege/401k_mistakes.pdf) Arranged in a table format, the feature identifies the potential errors and explains how to identify each of them, how to avoid the mistakes, and how to correct each mistake if it occurs. The 11 errors are

1. Not updating plan documents within the past few years to reflect recent law changes.
2. Failing to base plan operations on the terms of the plan document.
3. Failing to use the plan’s definition of compensation for all deferrals and allocations.
4. Failing to make employer matching contributions to all appropriate employees according to plan terms.
5. Failing to satisfy the ADP and ACP nondiscrimination tests.
6. Failing to identify all eligible employees and give them the opportunity to make a deferral election.
7. Failing to limit the elective deferrals to the amounts allowed under IRC §402(g) for the calendar year and failing to distribute any excess deferrals.
8. Failing to make timely deposits of employee elective deferrals.
9. Failing to make the required minimum contributions required for top-heavy plans.
10. Failing to properly make hardship distributions.
11. Failing to file a form 5500 return and to distribute a Summary Annual Report to all plan participants.

With the myriad of participant disclosures, notices, and plan explanations the Department of Labor requires plan sponsors provide to participants, it comes as no surprise that at some point any two of these documents may present conflicting information. Big problems arise when the provisions of the Summary Plan Description conflict with the provisions of the base document.

Aside from the base document itself, the SPD is subject to the greatest amount of scrutiny and usually is of the greatest use to the plan participants. The DOL has specific requirements on the style of the SPD as well as a requirement that the SPD be written in a “manner calculated to be understood by the average plan participant and…sufficiently comprehensive to apprise the plan’s participants of their rights and obligations under the plan.” Since ERISA is usually best understood by people who tend to write everything in long, complicated sentences filled with industry jargon, the task of writing an SPD with legal specificity using non-legal terminology can be challenging. When the SPD and the plan document do not match, the question of which one controls arises.

This question was recently discussed in the case of Washington v. Murphy Oil USA, Inc.. In Washington, the plan document stated that the participant would qualify for a long-term disability benefit after 10 years of vesting service. The SPD stated that only 5 years of vesting service was required to be qualified for the disability benefit. When Washington became disabled, he had eight years of vesting service and applied for the benefit believing he had satisfied the service requirements. The plan administrator denied the benefits stating that he was required to have 10 years of vesting service.

The Court ultimately sided with Washington, stating that “because the SPD in this case unequivocally vests disability benefits after five years of service and Washington has at least five years of vesting credit…, his right to disability benefits cannot be taken away.” The Court further stated that this approach was consistent with main purpose of the ERISA legislation, which is employee protection.

Differing terms in a document and SPD can occur in any multitude of ways, but the way most fraught with danger is not updating the SPD after any document amendment. With the Court seemingly willing to adopt any conflict of SPD and plan document in favor of the employees, any plan sponsor should take good care to ensure that its SPD is up to date with each document amendment and restatement.

The IRS has released proposed rules providing guidance on automatic enrollment arrangements in 401(k) plans. Generally, the existing laws that apply to safe harbor 401(k) plans regarding contribution notice and vesting requirements will also apply to qualified automatic contribution arrangements (QACAs). However, the vesting may be over two years in a QACA, as opposed to immediate besting in a conventional 401(k) safe harbor. Section 401(k) plans that adopt QACAs pursuant to the 2006 Pension Protection Act (PPA) provisions will, without testing, automatically satisfy the nondiscrimination ADP and ACP tests that apply to employee elective deferrals and employer matching contributions.

QACAs are required to have a uniform application to all eligible employees who decline to make an election. The initial minimum automatic elective deferral must be three percent of compensation and must increase by one percent for each of the next three plan years. The maximum amount of deferral under a QACA is 10 percent. The QACA will not fail the uniformity requirement if the plan varies the percentage based upon the number of years of participation, does not change the rate of elective deferral under a prior election in effect at the time of the inception of the QACA, or limits the deferrals to be in compliance with various IRS regulations.

Additionally, a QACA can prevent an employee from making deferrals for six months after he or she receives a hardship distribution. Notices about the provisions contained within the QACA are required to be given to eligible employees at least 30 days, but not more than 90 days, before the beginning of each plan year. The notice must inform the participants that they may elect out of the program or may change their deferral percentages.