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updated January 2010
The Pension Protetion Act (PPA) of 2006 provides that 401(k) plans with an automatic enrollment feature that satisfy certain requirements are treated as satisfying the nondiscrimination rules for deferrals and matching contributions and are not subject to the top heavy rules.
The PPA does this by creating an optional safe harbor exemption from annual compliance testing for automatic enrollment 401(k)s that meet certain requirements. Plans that automatically enroll employees (requiring them to "opt out" rather than "opt in") may choose to: (1) abide by the new automatic enrollment safe harbor rules, presented below, (2) comply with the current safe harbor rules, as described above, or (3) undergo annual compliance testing.
The new safe harbor exemption for automatic enrollment plans requires the following:
The automatic contribution level (amount deferred from employees' salaries must be at least:
• 3 percent in the first year.
•4 percent in the second year.
•5 percent in the third year.
•6 percent in all later years.
•But no more than 10 percent in any year.
These are baselines; for instance, an employer might choose to set an automatic employee contribution at 6 percent for all years and not bother with the administrative chore of adjusting from 3 to 6 percent over the first four years.
• Employer provides 100 percent matching on the first 1 percent of deferred salary, plus 50 percent matching on the next 5 percent deferred (maximum match of 3.5 percent). Or…
Option #2—nonelective contributions:
• Employer provides a contribution to employees' accounts equaling 3 percent of each plan-eligible employee's salary, even if an employee is not making elective deferrals.
But to reiterate, the pre-Pension Protection Act safe harbor also continues to be available as an option for all 401(k) plans, including those with or without automatic enrollment.
Joanne Sammer is a New Jersey-based business and financial writer.
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