Automatic enrollment 401(k) plans popular

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Automatic enrollment 401(k)
Small-business retirement plans

Automatic enrollment 401(k)

What’s different about this plan is that it automatically enrolls eligible employees in the plan. The employee is permitted to change the amount of his or her contribution or can opt out of contributing to the plan altogether. But unless the employee elects to opt out, he or she will be automatically enrolled.

Like the safe-harbor 401(k) plan, this plan is exempt from the annual nondiscrimination test. The initial automatic employee contribution must be at least 3 percent of compensation. Contributions may have to be automatically increased so that, by the fifth year, the automatic employee contribution is at least 6 percent of compensation. The automatic employee contributions cannot exceed 10 percent of compensation in any year.

The employer can choose to make one of two types of contributions to all participants: either a nonelective contribution of 3 percent of compensation, or a matching contribution of 100 percent for salary deferrals up to 1 percent of compensation and a 50 percent match for all salary deferrals above 1 percent but no more than 6 percent of compensation.