The 401(k) plan is a popular fringe benefit for employees and a way for employers to attract and retain workers. In brief, participants may elect to defer a portion of their salary to separate accounts on a pretax basis. The contributions are invested and can compound without any current tax erosion until you make withdrawals. This is a proven way to save funds for retirement.

On the downside, certain highly compensated employees (HCEs) may be hampered by the tax law’s nondiscrimination rules if enough employees do not join the plan. These rules have encouraged the use of “automatic-enrollment” 401(k) plans.

Reason: Deferrals are made on behalf of employees if they do not proactively opt out of the plan. Thus, it becomes more likely that the required levels of employee participation are met. Furthermore, several provisions in the Pension Protection Act of 2006 enhance the automatic-enrollment feature.

Let’s go back to the beginning. For 2008, an employee can defer up to $15,500 to a garden-variety 401(k) plan (the same as 2007). If you are age 50 or older, you can contribute an extra $5,000 this year, for a maximum total contribution of $20,500. An employer may choose to provide matching contributions up to certain levels. These contributions can also grow on a tax-deferred basis.

In addition to the usual requirements for qualified retirement plans, a 401(k) plan must meet an actual deferral percentage (ADP) test for pretax contributions and an actual contribution percentage (ACP) test for matching contributions. If the 401(k) plan fails either test, the employer must make corrective distributions to HCEs or provide extra contributions for non-HCEs. Note: Under a special safe harbor rule, the employer may provide minimum contributions of at least 3% of compensation to non-HCEs.

The automatic-enrollment feature generally results in more employees participating in the plan. So both the ADP and ACP tests may be satisfied with this option. That is good news for everyone concerned.

Key point: In the past, Congress approved of automatic-enrollment plans in a series of rulings and regulations. Now several rules are being liberalized for employers using an automatic-enrollment plan.

For example, the Pension Protection Act of 2006 preempts state laws that could interfere with the operation of an automatic-enrollment plan. Also, plan fiduciaries are relieved of their fiduciary responsibility for investing employee contributions when the employee fails to make an investment election if contributions are invested in a qualified default alternative. Yet another change authorizes a safe harbor from testing if certain technical requirements are met.

Caution: This is not a do-it-yourself proposition for most business managers. Do not hesitate to seek professional guidance.