SECURE 2.0 requires automatic enrollment for new 401(k) or 403(b) plans beginning in 2025. Automatic enrollment in a retirement plan is designed to make it easier for employees to participate and boost retirement savings. Employees who prefer not to participate can opt out.
Exceptions to the automatic enrollment mandate:
Plans established before December 29, 2022. The established date is the plan document’s initial adoption date, which may be different than the plan’s effective date.
Businesses that normally employ 10 or less employees.
New businesses that have been in existence for less than three years.
Churches and governmental entities are exempt.
Specific Requirements:
The initial (default) contribution rate must fall between 3% and 10% of compensation and apply uniformly to all employees enrolled automatically. However, employees retain the right to modify their savings rate to a higher or lower percentage or to stop deferrals altogether.
Automatic escalation will need to increase the initial default savings rate by 1% annually on the first day of the plan year until it reaches at least 10% up to the maximum of 15%. Employees may opt out of the increase. Annual increases can be avoided by setting the initial default contribution percentage at 10%.
Withdrawal rights should allow auto-enrolled employees to withdraw their earnings-adjusted contributions within 90 days after the employee’s first automatic enrollment contribution was withheld. These amounts are subject to income tax, but the 10% early withdrawal penalty does not apply.
Investment in QDIA is required. Auto-enrolled contributions must be placed in a qualified default investment alternative (QDIA) selected in line with the Department of Labor’s (DOL) guidance unless an employee affirmatively chooses different investments.
The mandatory automatic enrollment provisions add a layer of complexity to plan administration, but the benefit will be increased participation in retirement plans and greater savings for the future.
For more information, please visit our website at www.retirementplanners.com or email rpamatters@retirementplanners.com.Â
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