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For the Record I.R.S. Extends Automatic Enrollment Option To All Employees Who Fail To Make a 401k Election (Gibney, Anthony & Flaherty, LLP) In Revenue Ruling 98-30, the I.R.S. ruled that contributions made to a 401k plan without an affirmative election by a new plan participant were, nonetheless, considered to be elective deferrals where the plan gave the employee notice of his right to make an election and allowed the employee to revoke the default election at any time. In Revenue Ruling 2000-8 the I.R.S. has clarified that the result is the same where the employer amends a 401k plan to provide prospectively for an automatic 3% elective deferral for new or current employees who have not elected salary deferrals of at least 3%. As in the earlier ruling, the employer provided employees with advance notice of the change and gave them reasonable opportunity to revoke the default election. In both situations, the salary-reduction contribution that automatically is made if an employee does not make an affirmative election to receive cash satisfies the requirement of a cash or deferral election. The I.R.S. says that the 401k regulations don't require an employee to receive cash if he does not make an affirmative election to have an amount contributed to the plan. Rather, a cash or deferred election can be made when an employee fails to make an affirmative election if the amount is contributed to the plan on the employee's behalf, provided the employee had an effective opportunity to elect to receive that amount in cash. The I.R.S. says that an employee has an effective opportunity to elect to receive an amount in cash if he receives notice of the availability of the election and has a reasonable period to make the election before the cash becomes currently available. In addition, the contributions aren't made under a one-time irrevocable election (one-time irrevocable elections are banned under the 401k regulations) because employees can change the election in the future.
Making a 401k elective deferral the default choice (known as a negative election or automatic enrollment) may help to increase the actual deferral percentage (ADP) for nonhighly compensated employees and thus help to maximize the elective deferrals permitted to be made by highly compensated employees. Employer's who have difficulty getting newly eligible employees to sign up for their 401(k) plans should consider the negative election to increase plan participation.
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