With all of life’s responsibilities, automation can sure help make things easier. Things like automatic bill pay, automatic vacuums (Roombas for the WIN), and automatic transmissions have definitely helped me! Another “automatic” with several perks has become more prevalent with recent legislation: automatic enrollment in retirement plans.
SECURE 2.0 includes a new requirement that will affect many 401(k) and 403(b) plans. Beginning with the plan year that starts on or after January 1, 2025, 401(k) and 403(b) plans will be required to include an automatic enrollment provision.
Exemptions to the automatic enrollment requirement
The following types of plans are exempt from the automatic enrollment requirement:
- SIMPLE 401(k) plans
- Church plans
- Governmental plans
- New businesses during first three years of existence of the business or a predecessor business
- Plans established before the effective date of the Act (December 29, 2022)
- Businesses that normally employ fewer than 11 employees, through the one year period beginning after the last day of the tax year this limit is first exceeded
Employers in a MEP are looked at individually to determine if they are required to implement automatic enrollment. For example, if the plan was established before SECURE 2.0 was effective but a participating employer joins in 2025 and does not otherwise meet one of the exemptions, they will be required to include automatic enrollment for the employees of that employer, while the sponsor does not need to include automatic enrollment for its employees.
NOTE: There are many questions that arise when trying to determine how each of these exemptions apply. This is especially the case for the last three on the list. No guidance has been issued to provide clarity or answers to these questions, but this is anticipated.
More details on the automatic enrollment requirement
Any plan that is not exempt will be required to include an eligible automatic contribution arrangement (EACA) and have a qualified default investment alternative (QDIA) to apply if no investment elections are made. The requirements of the automatic enrollment provision are as follows:
- Provide participant notices before the start of each year
- Auto enroll all participants at 3%, unless they opt out or make an affirmative election
- Automatically increase any auto enrolled participants 1% annually up to at least 10%, but no more than 15%
- Provide for permissible withdrawals for up to 90 days
A different type of auto enrollment, a qualified automatic contribution arrangement (QACA), is also an EACA and will therefore meet the new legislation requirements. However, note that while a QACA normally only requires deferral rates to be increased to 6%, under the new requirement the increase must continue until at least 10% for anyone who does not opt out. This applies only to plans required to apply the automatic enrollment rules, not all plans that choose to use a QACA provision.
The benefits of adding an EACA
This new requirement includes some nice benefits for plans:
- Potential tax credit for small employers. Employers may be eligible for a tax credit of $500/year for the first three years they have an EACA. This is available for small employers—those with fewer than 100 employees earning more than $5,000/year.
- Extended time to process testing results. Plans that automatically enroll all participants (not just those hired after the date this is implemented) can take advantage of an extended time to process testing refunds. While the normal deadline is two-and-a-half months after plan year end, a plan with an EACA has six months to distribute refunds for a failed test.
- Better testing results. It’s likely that a plan will have more favorable ADP and ACP testing results with higher participation rates that may come with an automatic contribution arrangement. In addition, if the plan adopts a QACA, they will meet an ADP and ACP testing safe harbor.
Employers establishing new plans now may want to go ahead and add an EACA or QACA that satisfies these requirements. This will allow them to avoid the need for an amendment and changes to plan operations beginning in 2025.
Interested in learning more about automatic enrollment options and benefits? Fill out the form below and we’ll send you more information!