Can Plan Sponsors Limit the Automatic Enrollment Opt-Out Period?

“We sponsor an ERISA 403(b) plan with an automatic contribution arrangement (ACA). We love auto enrollment and the positive impact it is having on our participation, but still have a number of people that opt out, and would like to improve our participation figures even further. Could we add a provision that only allows participants 90 days to opt-out, otherwise they are in the plan for as long as they are employed? I thought I read something in the regulations about this.”

Stacey Bradford, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, vice president, Retirement Plan Services, Cammack Retirement Group, answer:

The Experts believe you may be confusing a provision under an EACA, or eligible automatic contribution arrangement, which permits employees to withdraw automatic contributions, including earnings, within 90 days of when they were made, with an opt-out restriction. Employees may opt out of an ACA at ANY time, and you cannot place restrictions on how long a period an employee has to opt out. That said, there is a type of contribution for which you can require an employee make a one-time irrevocable election as to whether or not to make the contribution, but in that case, it would NOT be an ACA, but an employee mandatory contribution. For more details on the difference between an ACA and an employee mandatory contribution see this Ask the Experts column.

Having said this, you can work with your plan’s recordkeeper to address solutions regarding the engagement of people who choose to opt out of the ACA. Many such individuals do so because they feel they cannot afford to contribute, and it may be possible to improve the financial wellness of such employees so that they can afford to save. Good luck!

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.