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Breaking Down Barriers for non-ERISA Automatic Enrollment

Linda Segal Blinn

Ten years ago, the Pension Protection Act of 2006 (PPA) cleared a barrier for some — but not all — defined contribution retirement plans to offer an automatic enrollment feature. Section 902 of PPA amended Section 514 of ERISA to provide that ERISA would “supersede any law of a State which would directly or indirectly prohibit or restrict the inclusion in any plan of an automatic contribution arrangement,” provided that the plan administrator satisfy requirements to provide notice of participant rights and obligations.

However, PPA left intact state law barriers if a DC plan was not subject to ERISA. As a result, an employer with a non-ERISA DC plan could add an automatic enrollment feature only if there was no state payroll protection laws in place. At that time, several states had such laws, which prevented an employer from taking amounts from an employee’s wages without that employee’s prior written consent.

Ten years later, state laws continue to evolve:

  • Some states have explicitly addressed automatic enrollment in non-ERISA plans. 
  • Other states permit an employer to deduct amounts from an employee’s wages if “the employer is required or empowered to do so by state or federal law.” While adding an automatic contribution feature is a an optional plan design element, an employer could point to the ability under the federal Internal Revenue Code to offer an automatic enrollment feature as being “empowered by federal law.” 
  • Still other states either continue to require written permission from the employee to make payroll deductions or have not addressed automatic enrollment at all.

What should an employer consider if it wants to add an automatic contribution feature to its non-ERISA 403(b) or 457(b) plan?

Do your homework. Research state law applicable to your plan to determine if an automatic contribution feature is barred because of payroll protection statues.

Remember to check enabling law if the sponsor is governmental.
If state law is not a barrier and the employer is a governmental entity (including a public school), the research should also include determining whether the governmental entity is authorized under state or local law to add an automatic contribution provision to the plan.

Assess which non-ERISA plans can use the automatic contribution feature. The 403(b) plans sponsored by a public school and 457(b) plan sponsored by a governmental employer have a statutory exemption from ERISA as governmental plans.

But a 403(b) plan of a 501(c)(3) nonprofit organization without a church-affiliation is exempted from ERISA only if the Department of Labor (DOL) safe harbor regulations are met. The employer’s selection of a vendor to receive automatic contributions would need to be assessed against the applicable facts and circumstances to determine whether that selection would be considered a discretionary activity causing the 403(b) plan to fall outside the non-ERISA regulatory safe harbor.

As explained in DOL Field Assistance Bulletin 2010-1: “The preamble to the final regulation at 29 CFR 2510.3-2(f) explained that ‘[t]his [reasonable choice] provision is designed to prevent an employer not wishing to be deemed to be maintaining a pension plan from restricting products available to employees, or limiting available contractors to one selected by the employer when several seek to make their services and products available to employees, unless even in the presence of such limitation the employees of the employer are afforded a reasonable choice, in light of relevant circumstances.’"

Determine whether collective bargaining agreements need modification. If plan provisions have been established under collective bargaining negotiations, the agreement may need to be amended if the employer intends to cover its union employees under an automatic contribution arrangement.

Linda Segal Blinn, J.D.*, is a member of the NTSA Communications Committee and is vice president of Technical Services for Tax-Exempt Markets at Voya Financial. In this as vice president, Blinn leverages over 25 years of experience administering and designing defined contribution plans to provide general legislative and regulatory information to assist public and non-profit employers in operating their retirement plans.

This material was created to provide accurate information on the subjects covered. It is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation. These materials are not intended to be used to avoid tax penalties, and were prepared to support the promotion or marketing of the matters addressed in this document. The taxpayer should seek advice from an independent tax advisor.

*Linda is not a practicing attorney for Voya Financial.

Opinions expressed are those of the author, and do not necessarily reflect the views of NTSA, or its members.