IRS Approves Automatic 401(k) Enrollment | AccountingWEB

IRS Approves Automatic 401(k) Enrollment

Companies that offer 401(k) plans are becoming more aggressive about automatically enrolling employees in the wake of an Internal Revenue Service blessing on the practice, as long as employees are aware of what is occurring.

While 401(k) plans have been long considered among the best retirement preparation tools, millions of eligible workers are not taking full advantage of the programs, the Sun-Sentinel reported.

Some start with good intentions by committing a percentage of their pay to the savings plans but never increase the contribution as their pay increases. The new IRS ruling gives employers the authority to act when employees do not.

The ruling, made in what the IRS calls a "general information letter," allows companies to automatically enroll employees in a 401(k) plan and even increase their contribution levels on time increments or when employees receive raises or bonuses, the Sun-Sentinel reported.

While some may see Big Brother at work when a company automatically enrolls its employees, the IRS made it clear that employees can opt out at any time.

Karen Ferguson, who as director of the Pension Rights Center in Washington is an advocate for workers, told the Sun-Sentinel that companies are not infringing on employee rights when they enroll them into 401(k) plans without their consent.

"If employees don't have something like this, too many of them are going to end up living on nothing but Social Security when they retire, and that won't even keep them at the poverty level," Ferguson said. "In the old days, companies contributed for you. This is the closest approximation available to today's workers."

Traditionally, companies tell employees about the savings plan and wait for them to take action. In this new scenario, automatic enrollment occurs unless the employees specifically say they don’t want it.

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