IRS Letter May Open Door for Auto Enrollment in More Governmental 457 Plans

A recent Internal Revenue Service (IRS) private letter ruling (PLR) could broadly expand the use of automatic enrollment in 457(b) retirement plans sponsored by public-sector employers. Auto enrollment in 457(b) plans has been allowed by the IRS, but governmental plan sponsors have been reluctant to use it due to state laws and administrative concerns.

In the PLR describing the plan features, the IRS says, “Maintaining an EACA [eligible automatic enrollment arrangement] (within the meaning of Section 414(w)(3)) through the Plan, under which the participant is treated as having elected to have the employer make contributions in an amount equal to a uniform percentage of compensation provided under the Plan until the participant specifically elects not to have contributions made (or specifically elects to have contributions made at a different percentage), does not cause the Plan to fail to satisfy Section 457(b)(4) and Section 1.457-4(b).”

ICMA-RC [ICMA Retirement Corp.] says the IRS favorable letter ruling is the first to adapt the Pension Protection Act (PPA)’s auto-enrollment rules to a governmental 457(b) plan. While private letter rulings are not considered formal precedent, they do provide insight into the IRS’ views. ICMA-RC expects that its model 457(b) plan will encourage governmental plan sponsors to adopt auto-enrollment in their 457(b) retirement plans in states that allow the practice.

As some states forbid deferrals to be deducted from employee’s paychecks without the person’s consent, public-sector employers should be mindful of their particular state’s law.