Automatic enrollment in 401k and 403b Plans – the practice of automatically deducting employee contributions from pay unless the employee affirmatively opts-out – has been promoted in various ways by Congress, the IRS, and U.S. Department of Labor since the mid-1990s. However, until recently, there was no federal mandate that 401k and 403b Plans must have auto-enrollment. The retirement plan law changes in December 2022 known as SECURE 2.0 include a mandatory auto-enrollment requirement for most plans “established” after December 28, 2022.
When is auto-enrollment mandatory? For a covered plan, automatic enrollment will be required by the Plan Year that begins in 2025.
The IRS issued guidance regarding what it means for a plan to be “established” after December 28, 2022. In general, if the initial Plan Document was signed after that date, the plan is covered.
There are a few temporary exceptions: new businesses that have been “in existence” for less than three (3) years and businesses which “normally” employ no more than 10 employees. The IRS has not issued guidance clarifying these rules. Therefore, because the exceptions only delay the effective date and there is ambiguity, it is our recommendation that they be ignored, and automatic enrollment be adopted in 2025.
What are the mandatory conditions?
- Automatic enrollment must begin with an initial employee payroll deduction of at least 3% of eligible pay (but could begin at up to 10% at the employer’s discretion). The employee can opt-out, or choose a different percentage, before auto-enrollment occurs. There has not been IRS clarification, but we believe this only applies to employees who are newly eligible on or after the 2025 effective date.
- The employee’s contribution rate must automatically increase by 1 percentage point per year to a maximum of at least 10% of pay (at the discretion of the employer, the “cap” on this “auto-escalation” could be up to 15%).
- Employees who are automatically enrolled may retroactively opt-out within the first 90 days and receive a refund from the Plan (including earnings).
- Automatic contributions must be invested in a “qualified default investment alternative” (QDIA).
- IRS-required notices about auto-enrollment need to be given to employees at various times.
ACSI is identifying clients’ plans for which auto-enrollment should be implemented. ACSI will be sending Plan Documentation to impacted clients, and we will make the necessary recordkeeper updates on the clients’ behalf for impacted plans. ACSI is available to work with the client and its payroll provider to determine how to implement automatic enrollment and auto-escalation in payroll.
For certain “small” employers, there likely is a Federal Tax Credit of $500 per year for three years for starting a plan with auto-enrollment or adding auto-enrollment to an existing plan (for more details, please read the ACSI articles Federal Tax Credit Available For A Small Business That Adds — Or Maybe Added — 401k Plan Auto-Enrollment and “Supercharged” Tax Incentives for a “Small” Employer that Starts a Retirement Plan).
ACSI is available to answer questions about how the automatic enrollment changes of SECURE 2.0 may impact your 401k or 403 Plan.
