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IRS, Treasury Pave Way for Easier 401(k) Auto-Enrollment

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The Treasury Department and Internal Revenue Service on Thursday issued guidance designed to facilitate automatic enrollment and contribution increases in 401(k) and similar retirement savings plans through a “correction safe harbor.”

The guidance adds to the current IRS self-correction program, which allows plan sponsors to easily correct administrative errors without risking the plan’s tax qualification and without having to obtain IRS approval.

“Today, Treasury and IRS are taking another step to promote broader participation in 401(k) and similar plans by facilitating automatic enrollment and automatic contribution increases,” said J. Mark Iwry, senior advisor to the secretary and deputy assistant secretary for retirement and health policy, in a statement.  “These simplified, safe harbor correction methods build on previous steps to encourage plan sponsors to adopt ‘next generation’ features and practices that help employees save for retirement.”

Senate Finance Committee Ranking Member Ron Wyden, D-Ore., said Thursday that the guidance will “facilitate automatic enrollment in and contributions to 401 (k) and similar retirement plans by improving the process for correcting errors to make it easier for businesses to maintain these plans for their workers.”

These improvements from Treasury and IRS “mark an important step in helping millions of Americans save for a secure retirement,” Wyden said. “Automatic enrollment in retirement plans is a promising method to increase retirement saving. The changes made today will make it easier for small businesses to set up a retirement plan with automatic enrollment features and help more middle-class Americans prepare for retirement.”

Wyden and several other Democratic members of the Finance Committee sent a letter last year to the Treasury Department requesting action on the issue.

The guidance also provides other new safe harbor methods to simplify and reduce the cost and burden of correcting certain errors in 401(k) and similar plans regardless of whether they use automatic enrollment or automatic increases.

Treasury and IRS said the guidance responds to public comments from 401(k) sponsors and service providers, and “simplifies and reduces the cost and burden of the correction process if a 401(k) or 403(b) plan using automatic enrollment or automatic increases fails to implement the correct amount of employee contribution.”

The “correction safe harbor” for plans with automatic contribution features requires the plan sponsor to make all employer matching contributions that should have been made with respect to the missed employee contributions, and to contribute an additional amount to make up for the earnings that should have accrued under the plan on those matching contributions. 

The plan is also required under the guidance to notify participants of errors and corrections, and of their ability to make up for the missed employee contributions by electing larger employee contributions going forward.

Craig Hoffman, general counsel for the American Retirement Association, said the changes–which reflect the “ongoing” dialogue between Treasury and ARA–”will lead to more automatic enrollment designs being adopted by plan sponsors, and that the ultimate beneficiaries will be American workers.”

The new correction methods are effective immediately, while the new safe harbor for plans using automatic contribution features applies to administrative errors occurring before 2021. 

The guidance is open for public comment.

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