An automatic contribution arrangement (also known as automatic enrollment) is a feature in a retirement plan that allows an employer to “enroll” an eligible employee in the employer’s plan unless the employee affirmatively elects otherwise. “Enroll” in this context means that part of the employee’s wages are contributed to the retirement plan on the employee’s behalf. Most commonly, this feature is in 401(k) plans, but it can also be included in the following types of plans that permit employees to make elective contributions:
The employer automatically reduces an employee’s wages by a default percentage stated in the plan and contributes that amount to the employee’s plan account as an automatic enrollment contribution. The employee may affirmatively choose not to contribute at the plan’s default percentage rate or to contribute a different amount. The employee is 100% vested in (owns) his or her automatic enrollment contributions.
Generally, most plans will deduct automatic enrollment contributions from an employee’s pre-tax wages. This means that the amounts deducted are not included in the employee’s taxable wages or subject to income tax withholding requirements. However, 401(k) and 403(b) plans that accept designated Roth contributions can specify that the automatic enrollment contributions will be designated Roth contributions, which means they are 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.