Bipartisan bill would promote auto-reenrollment in DC plans 

August 24, 2023
New bipartisan House and Senate legislation, the Auto Reenroll Act of 2023 (HR 4924, S 2517), would encourage — but not require — employers sponsoring defined contribution (DC) plans to automatically reenroll noncontributing employees at least once every three years. The proposed changes would apply for plan years beginning after the bill becomes law. Plans with existing reenrollment features would have relief from the new requirements for plan years starting before the bill’s enactment. Whether those plans would need to make changes for plan years starting after the legislation’s enactment isn’t clear. While retirement bills rarely pass Congress on their own, the measure stands a good chance of getting included in any bipartisan package of reforms that might take shape.

Building on auto-enrollment’s success

The Auto Reenroll Act’s sponsors hope to build on the success of auto-enrollment and help DC plan sponsors reenroll lower-wage workers who previously opted out so they can start building retirement savings. “Many Americans have the option to enroll in employer-sponsored retirement plans, but they do not take advantage of this benefit and miss out on critical retirement contributions from their employers,” Sen. Tim Kaine, D-VA, said in a news release. Citing March 2022 data from the Bureau of Labor Statistics, Kaine and the bill’s other sponsors — Rep. Kathy Manning, D-NC, and Sen. Bill Cassidy, R-LA — noted that only 75% of private-sector workers with access to employer-sponsored retirement plans elect to participate. Both Kaine and Cassidy sit on the Senate Committee on Health, Education, Labor and Pensions.

Evolution of auto-enrollment. Starting in 1998, a series of IRS rulings let DC plans automatically enroll eligible employees as long as they could opt out. To promote more widespread adoption of automatic enrollment arrangements, the Pension Protection Act (PPA) of 2006 (Pub. L. No. 109-280) clarified that

ERISA preempts state wage-withholding laws that could prevent DC plans from automatically enrolling employees. PPA also introduced two auto-enrollment options for 401(k), 403(b) and 457(b) plans:

  • The eligible automatic contribution arrangement (EACA), which can give newly enrolled employees an opportunity to withdraw default contributions
  • The qualified automatic contribution arrangement (QACA), a safe harbor design that can exempt plans from the actual deferral percentage (ADP) and actual contribution percentage (ACP) nondiscrimination tests

The SECURE 2.0 Act of 2022 (Div. T of Pub. L. No. 117-328), the far-reaching retirement legislation passed last December, includes a provision effective in 2025 that requires new 401(k) and 403(b) plans to auto-enroll employees. Certain plans are exempt from this requirement, including plans established on or before Dec. 28, 2022 (see Road-testing SECURE 2.0’s auto-enrollment mandate for new DC plans (Feb. 14, 2023) for more information).

Auto-reenrollment framework. PPA didn’t address whether DC plans could reenroll employees who opt out of automatic enrollment. However, in the preamble to regulations on PPA’s automatic contribution arrangements, IRS said plans can provide that an employee’s affirmative election expires after a period of time. Unless the employee makes another affirmative election, the plan could then automatically reenroll the employee at the default contribution rate. Some plans with auto-enrollment features have applied this guidance to periodically reenroll employees who have opted out. (Manning and Kaine last year introduced similar bills (HR 6782, S 3712) that would have mandated reenrollment features in automatic contribution arrangements adopted after 2024, but that legislation didn’t advance.)

Overview of the bill

The Auto Reenroll Act focuses primarily on reenrollment under EACAs and QACAs. The bill would amend the Internal Revenue Code (IRC) to confirm that EACAs and QACAs may include automatic reenrollment features that meet certain conditions.

Termination of opt-out elections. The bill would allow (but not require) EACAs and QACAs to terminate an employee’s election not to contribute at least one year but no more than three years later. The employee would then be automatically enrolled at the plan’s default contribution rate unless the employee makes a new election not to contribute (or elects to contribute at a different rate). The bill apparently wouldn’t let a plan terminate an employee’s affirmative election to contribute at a rate lower than the plan’s default rate.

Reenrollment at one time possible. To help simplify administration, the bill would allow plans to reenroll all employees at one time during the plan year.

Disregarded employees under QACAs. A newly adopted QACA currently can exclude from auto-enrollment existing eligible employees who have made affirmative elections, including elections not to contribute. The bill would require new QACAs to cover existing employees with affirmative opt-out elections (but would permit continued exclusion of employees with affirmative elections to contribute). The bill would also allow (but not require) preexisting QACAs to reenroll employees previously excluded at the QACA’s inception because of affirmative opt-out elections.

ERISA preemption. The bill would make corresponding ERISA changes confirming federal preemption of state laws that could interfere with automatic reenrollment, such as state wage-withholding laws. Because ERISA’s preemption relief isn’t limited to QACAs and EACAs, the bill would appear to provide reenrollment flexibility for ERISA plans with other auto-enrollment designs.

Implications for preexisting reenrollment features. Recognizing that some plans — including those with QACAs or EACAs — already offer automatic reenrollment, the bill prohibits drawing any inferences about the permissibility of those arrangements under existing IRC and ERISA provisions for plan years beginning before the measure’s enactment. The bill also forbids interpreting its changes to apply to reenrollment features that terminate opt-out elections after more than three years.

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