At What Rate Should Rehires Be Auto-Enrolled

“We sponsor an automatically enrolled 403(b) plan that is a qualified automatic contribution arrangement. We also utilize an automatic escalation feature, with the deferral amount increasing by 1% from the auto-enrolled minimum of 3% each plan year, which is the calendar year in our case. We recently had a rehired participant who, when she left three years ago, was automatically enrolled at an auto-escalated 4% deferral rate. Upon rehire, should she be auto-enrolled at that 4% deferral rate, or would she revert to the 3% default deferral rate for new hires?”

Charles Filips, Kimberly Boberg, David Levine and David Powell, with Groom Law Group, and Michael A. Webb, senior financial adviser at CAPTRUST, answer:

The answer, as it is in many cases, is that it depends on what the plan document says! Let’s check out the relevant section of the Treasury Regulations (1.401(k)-3(j)(2)(iv)) here:

(iv) Treatment of periods without default contributions. The minimum percentages described in paragraph (j)(2)(ii) of this section are based on the date the initial period begins, regardless of whether the employee is eligible to make elective contributions under the plan after that date. However, for purposes of determining the date the initial period described in paragraph (j)(2)(ii)(A) of this section begins, a plan is permitted to treat an employee who for an entire plan year did not have contributions made pursuant to a default election under the qualified automatic contribution arrangement as if the employee had not had such contributions made for any prior plan year as well.

Whenever we see the words “a plan is permitted,” as we do here, then we know that the plan sponsor has the option to elect the provision in its plan. The particular election here involves an auto-enrolled participant who did not have contributions made pursuant to a default election under the qualified automatic contribution arrangement for an entire plan year, as is the case with your rehire who had terminated employment three years prior. If the language in your plan document permits you to treat the employee as if she had not made automatic contributions pursuant to an automatic contribution arrangement in any prior plan year, she is eligible to be auto-enrolled at 3% as if she were a new hire. If no such language is present in the plan document, she would be auto-enrolled at 4%, which was her auto-enrollment deferral percentage when she left. If you are uncertain as to the plan language, please contact the author of the plan document for clarification.

Note that, since this is an optional provision, if the current plan language is not practical from an administrative or other perspective, it can be amended accordingly.

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.

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