An automatic contribution arrangement (also known as automatic enrollment or auto enroll) is a retirement plan feature common in 401(k) plans, but can also be in one of the other plan types listed below that permit employees to make elective contributions.
Automatic contribution arrangements allow employers to "enroll" eligible employees in the retirement plan automatically unless the employee affirmatively elects not to participate. "Enroll" means that the employer contributes part of the employee's wages to the retirement plan on the employee's behalf.
The employer automatically reduces an employee's wages by a plan-specified default percentage and contributes that amount to the employee's plan account as an automatic enrollment contribution. The employee may choose to:
- not contribute to the plan or
- contribute a different amount.
Employees are always 100% vested (own) in their automatic enrollment contributions.
Generally, most plans deduct automatic enrollment contributions from an employee's pre-tax wages. This means that the employees don't pay taxes on the contributions. However, 401(k) and 403(b) plans that accept designated Roth contributions can specify that the automatic enrollment contributions are designated Roth contributions, which means they're deducted from an employee's after-tax wages. An employer must deposit an employee's automatic enrollment designated Roth contributions into a designated Roth account.