When it comes to the regulatory aspect of balancing benefit expansion, there are pros and cons to auto-enrolling employees in savings accounts. Auto-enrolling employees in an emergency savings account could change the plan testing procedure. On the other hand, auto-enrollment in savings accounts could have a positive impact on testing.
The balancing act most plan sponsors engage in to expand benefits, minimize costs, and remain within regulatory rules can feel like walking a tightrope. Most employees still do not have sufficient funds to cover an emergency of $1000.[1] Financial circumstances like this, that are continual and concerning, can reduce employee productivity. Recent studies show that almost a third of all respondents said they were stressed about their finances “constantly.” And 80% of all employers surveyed noted that their employees’ financial circumstances impacted their work. While sponsors continue to find new ways to help, like taking advantage of student loan matching programs, that third item in balancing, the regulatory rules may find sponsors hard pressed and hesitating. Over the last year, we’ve been looking at aspects of auto-enrolling employees in programs intended to help improve financial circumstances, including savings accounts and financial education programs. Here, we look at the concerns around regulatory rules, specifically, plan testing.
When it comes to auto-enrolling employees in retirement plans, there is almost unanimity in acceptance among sponsors. “73% of companies surveyed automatically enroll employees in the company 401(k) plan.”[2] The impact of auto-enrollment is impressive – many analysts suggest that auto-enrollment beefs up retirement plan participation from about 50% to close to 80% of all employees. And we know that sponsors find that the acceptance of auto-enrolling in the 401(k) plan to be so widespread that they have begun auto-enrolling employees in other programs, like financial education. Auto-enrolling employees in benefits may also help reduce the administrative burden on HR departments, especially those with seasonality in some of their workers hours, which may make eligibility tracking cumbersome.
Auto-enrolling in other programs, like FinEd, can boost employee participation in 401(k) programs as well. “Employees will usually not take advantage of some of the benefits you offer simply because they seem too complicated…When your staff has a better grasp of their financial situation, they’ll be better equipped to use benefits….” Increased use of benefits leads to greater employee retention and satisfaction.”[3] Auto-enrolling employees in like FinEd can help employees in two ways: it can help them appreciate the benefits of auto-enrolling and which can help them auto-enroll in other retirement savings programs, like IRAs.
While the benefits are obvious, the regulations around auto-enrolling employees in savings accounts to help prevent crises, like Health Savings Accounts (HSA) or emergency accounts, are not as straightforward. When it comes to HSAs, healthcare eligibility requirements limit auto-enrollment. However, sponsors may want to contact their healthcare benefits providers because “[s]ome HSA providers benefit from state law that provides that an HSA is automatically established on the first day of coverage under an HSA-qualified healthcare plan as long as the HSA is opened before the federal income tax filing deadline for that year.”[4] When it comes to auto-enrolling in savings accounts, sponsors may be concerned with other regulations, specifically, those involving testing.
The Secure Act 2.0 made some changes to testing procedures (for top heavy testing and family/related companies),[5] and also made segregation of some benefits, like student loan payments, possible.[6] Those testing changes were intended to help businesses encourage younger employees to save. These changes to testing apply to plan years starting in 2024.[7]
The specifics on auto-enrolling employees in emergency savings accounts in the Secure Act 2.0 are straightforward:
· When: plan years after December 31, 2023
· What: defined contribution plans can provide a savings account, with contributions on a Roth basis that are held.
· Who: only non-highly compensated employees.
· How: Contributions must be held in cash, in either an interest-bearing account or a fund designed to preserve capital.
· How much: contributions are limited to $2,500 annually, capped to 3% of annual pay. Matching contributions are allowed.[8]
· Withdrawals: participants must be allowed to make withdrawals per month, and also the first four of those withdrawals cannot be penalized.[9]
How these the emergency savings accounts can affect plan testing is a little more involved. Since the accounts are to be treated as Roth accounts, it seems possible that they could be part of plan testing. The IRS explains that the two nondiscrimination tests for 401(k) plans are called the Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests. Roth contributions are subject to the ADP test. In explaining the nondiscrimination test, the IRS says: “The ADP test counts elective deferrals (both pre-tax and Roth deferrals, but not catch-up contributions) of the [highly compensated employees (HCEs) and rank-and-file employees (nonhighly compensated employees (NHCE))]. Dividing a participant’s elective deferrals by the participant’s compensation gives you that participant’s Actual Deferral Ratio (ADR). The average ADR for all eligible NHCEs (even those who chose not to defer) is the ADP for the NHCE group. Do the same for the HCEs to determine their ADP.”[10]
That means when it comes to the regulatory aspect of balancing benefit expansion, there are pros and cons to auto-enrolling employees in savings accounts. Auto-enrolling employees in an emergency savings account could change the procedure plan sponsors and plan administrators use in performing their testing. There is also uncertainty as to whether the IRS will treat emergency accounts as Roth accounts for testing.[11] On the other hand, as to testing, auto-enrollment could change the ADP result for NHCEs, making testing results more positive.
[1] https://www.integrity-data.com/blog/why-financial-education-is-a-growing-employee-benefit
[2] https://blog.healthequity.com/can-you-auto-enroll-your-employees-into-an-hsa
[3] https://www.integrity-data.com/blog/why-financial-education-is-a-growing-employee-benefit
[4] https://blog.healthequity.com/can-you-auto-enroll-your-employees-into-an-hsa
[5] https://www.employeefiduciary.com/blog/secure-act-2.0-summary
[6] https://www.venable.com/insights/publications/2023/01/secure-20-has-arrived-heres-what-you-need
[7] https://www.bakerlaw.com/alerts/secure-20-act-2022congress-final-gift-2022-retirement-plan-sponsors
[9] https://www.employeefiduciary.com/blog/secure-act-2.0-summary
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.
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