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Auto Enrollment Opportunities Expand for Public Sector Retirement Plans

October 30, 2017

Recent IRS ruling approves the successful 401(k) practice for 457(b) plans

A recent IRS Private Letter Ruling could broadly expand the use of auto enrollment in 457(b) retirement plans sponsored by public sector employers. ICMA-RC, which provides retirement plans and related services to more than a million public sector accounts, recently helped a public sector plan sponsor obtain the favorable letter ruling, which incorporates many of the 401(k) auto enrollment rules into 457(b) plans. ICMA-RC will provide its public sector clients with a model 457(b) plan document incorporating auto enrollment based on the plan approved by the Private Letter Ruling.

Auto enrollment is a retirement plan feature that automatically enrolls new employees into their employer-sponsored retirement plan while allowing them the ability to opt out at any time. It is used to increase employee participation in plans and to promote retirement savings. The IRS favorable letter ruling is the first to adapt the 401(k) auto enrollment rules to a governmental 457(b) plan. While Private Letter Rulings are not considered formal precedent, they do provide insight into the IRS's views. ICMA-RC expects its model 457(b) plan will encourage governmental plan sponsors to adopt auto enrollment in their 457(b) retirement plans within states that allow automatic enrollment.

"ICMA-RC is pleased to have led the industry in advocating for this terrific opportunity for public sector employees, many of whom benefit from being automatically enrolled into their employers' retirement plans for the first time," said ICMA-RC President and CEO, Bob Schultze. "Plans that automatically enroll employees help them build retirement security — which is consistent with ICMA-RC's mission — by increasing both participation and savings rates."

While some public sector providers have been offering 457(b) plans with auto enrollment, the IRS has not provided a formal ruling regarding those plans. The recent IRS Private Letter Ruling should provide public sector employers who wish to auto enroll employees into a 457(b) plan with comfort that a plan with the auto enrollment features of the ICMA-RC model would not jeopardize the tax-favored status of their plans. Auto enrollment for governmental plans may not yet be prevalent as not all states currently allow it, however, in recent years, state legislatures appear to increasingly favor auto enrollment.

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