Plan-directed auto-escalation is a feature within certain 401(k) plans that automatically increases employee contribution rates by a set amount over time. Instead of relying solely on participants to proactively and manually increase their contribution amounts, auto-escalation helps boost employee contributions and overall savings automatically.
When auto-escalation applies
Auto-escalation only applies to certain 401(k) plans that include this particular provision. Some plan types, such as qualified automatic contribution arrangement (QACA) plans, require an auto-escalation, though it may be optional for others.
Additionally, auto-escalation will only apply to employees who are automatically enrolled at the company’s default deferral rate and do not set their own contribution rate. However, once an employee manually sets their contribution rate (makes an affirmative election), then the auto-escalation will no longer apply and any future contribution rate increases will need to be completed manually. Here's how to participants can change their 401(k) contribution rate.
How auto-escalation works
Auto-escalation operates on a pre-set schedule that outlines the timing and rate of the contribution increases, as well as the rate limit.
For instance, say a plan has a default deferral rate of 3% and an annual 1% auto-escalation feature until an employee reaches a 6% contribution rate. In this case, all employees who were auto-enrolled will have their employee contribution rate increased on January 1 by 1% until they reach 6% or they make their own deferral election.
How auto-escalation works for QACA plans
While some plans do not require auto-escalation or have flexibility in how it is implemented, qualified automatic contribution arrangement plans must follow specific guidelines.
To meet QACA standards, deferrals must increase to at least 6% but can go as high as 15%. While there is flexibility in setting the automatic escalation schedule, plans at Guideline must meet the following minimums each year:
Year 1: 3%
Year 2: 4%
Year 3: 5%
Year 4: 6%
For plans with a starting deferral rate of at least 6%, auto-escalation is not required. Additionally, if a participant makes an affirmative election, the auto-escalation will no longer apply.
Please note that auto-escalation will be required for many non-QACA plans starting in 2025.