Automatic enrollment is IRS- sanctioned and a proven way to increase 401k participation company-wide. However, because certain legalities outside of the scope of the IRS remain unclear, it is prudent to consult a legal advisor before adopting automatic enrollment for your 401k plan.
With automatic enrollment, employees are automatically enrolled in the 401k plan as soon as they meet the plan's participation eligibility requirements. A default investment (typically a money market fund) and a default contribution rate (typically somewhere between 3% and 5% of compensation) are preset by the employer for automatically activated participation.
All passively enrolled employees are immediately notified of their new 401k participation status and given the opportunity to change their contribution rate and investment(s) or withdraw from the plan entirely.
Even the small amount of money placed in a 401k for a new employee who cancels participation soon after automatic enrollment must stay in the plan until the person's employment is terminated or the employee will face early withdrawal penalties