The SECURE Act 2.0, signed into law in December 2022, introduced key changes to retirement plan regulations, with one of the most significant being the automatic enrollment requirement for employers with 401(k) and 403(b) plans. Starting in 2025, employers will be required to automatically enroll eligible employees in these retirement plans. This change is designed to boost employee participation by eliminating the barriers of procrastination or indecision. In this post, we’ll explore rules, compliance considerations, and why employers should consider adopting this feature.
What is Automatic Enrollment Under the SECURE Act 2.0?
Beginning in 2025, employers with new 401(k) or 403(b) plans must automatically enroll eligible employees at a contribution rate between 3% and 10% of salary. Additionally, employee contribution rates will automatically increase by 1% annually until reaching a maximum of 10%. Employees can opt out or change their contribution rates at any time. The goal is to encourage retirement savings through a simple, default system, addressing the problem of employee inaction. Research shows that automatic enrollment significantly increases participation rates, especially for employees who may delay or neglect enrollment.
Key Compliance Considerations for Employers
Employers must ensure compliance with several key provisions under the SECURE Act 2.0:
1. Eligibility: Employers must automatically enroll employees who meet the plan’s eligibility criteria, including age and service requirements.
2. Default Contribution Rate: The default rate must be at least 3% but no more than 10% of the employee’s salary. Employers may choose a higher rate, but not below the minimum.
3. Automatic Escalation: Contributions will increase by 1% annually, up to 10%. Employers need to ensure their systems can support this feature.
4. Opt-Out Process: Employees must be clearly informed about the opt-out process and how they can change their contribution rates.
5. Recordkeeping: Employers must maintain accurate records of employee elections, contributions, and any changes to participation.
Why Employers Should Adopt Automatic Enrollment
Automatic enrollment offers numerous benefits for employers, including:
1. Increased Employee Participation: By automatically enrolling employees, businesses can increase participation rates, helping employees start saving for retirement without delay.
2. Financial Wellness: Employees who begin saving early benefit from compound growth, leading to greater retirement security over time.
3. Talent Attraction and Retention: Offering automatic enrollment makes your retirement plan more attractive to potential and current employees, fostering loyalty and reducing turnover.
4. Reduced Administrative Burden: Although setup and communication require effort, automatic enrollment can streamline HR processes by reducing the need for manual sign-ups and reminders.
5. Tax Incentives: Employers who add automatic enrollment may qualify for SECURE Act 2.0 tax credits, which can help offset administrative costs and employee education efforts.
6. Fiduciary Protection: Automatic enrollment provides some level of protection against claims of inadequate retirement savings, as it demonstrates the employer’s commitment to employee financial security.
How Employers Can Prepare for Automatic Enrollment
To comply with the SECURE Act 2.0, employers should:
1. Review Plan Design: Work with your retirement plan provider to ensure your plan accommodates automatic enrollment and escalation.
2. Update Plan Documents: Ensure that your plan’s documents reflect the new requirements.
3. Communicate to Employees: Clearly inform employees about the automatic enrollment process and how they can opt out or adjust their contribution rate.
4. Monitor Compliance: Regularly review your plan to ensure ongoing compliance with SECURE Act 2.0 provisions.
5. Consult a CPA or Financial Advisor: Work with a CPA or financial advisor to navigate compliance and optimize the retirement plan for both your business and employees.
Conclusion Automatic enrollment under the SECURE Act 2.0 is a significant shift, but it’s also an opportunity for employers to boost employee participation, enhance financial wellness, and improve benefits offerings. By adopting this provision, employers can help employees build long-term savings, increase employee loyalty, and ensure compliance with federal regulations.
Stay informed with the IRS’s latest guidance on the SECURE Act 2.0, Notice 2024-2.
