Attorney Alexandra Ifrah talks to Arkansas Business about the benefits of automatic enrollment of employees in 401(k) plans. The strategy, which is a trend nationwide, can help companies in several ways.
Automatically enrolling employees in their 401(k) plans, a trend that’s picking up around the United States, can help companies in several ways, according to employee benefits experts in Arkansas.
Automatic enrollment increases plan participation, and increased plan participation helps employers meet the “nondiscrimination” tests of the Internal Revenue Service. These tests seek to ensure that 401(k) plans, which come with tax breaks, are fair to all by determining whether contributions made by rank-and-file employees are proportional to contributions made by owners and managers — highly compensated employees, or HCEs, in IRS parlance.
The automatic enrollment strategy, in turn, helps companies recruit and retain high-value executives as well as rank-and-file employees.
But as Attorney Alexandra Ifrah explains, it may not be for everyone:
Companies with high turnover that implement auto enrollment could end up with a lot of small account balances, Attorney Alex Ifrah added.
It also doesn’t make sense for very small companies like doctors’ offices and law firms to implement auto enrollment, the attorney said. Those are unlikely to pass the IRS tests either way and will likely need a safe harbor plan where rank-and-file participation and contributions don’t affect how much highly paid workers and owners can contribute to their 401(k) accounts.
Alex is a partner in the Employee Benefits Practice Group of Friday, Eldredge & Clark. Since joining the firm in 1999, Alexandra has concentrated her practice on the representation of employers from a myriad of industries in complex employee benefits, taxation and executive compensation matters.