VOL 15: AUTO-ENROLLMENT PROVISION
How the Auto-Enrollment Provision will Impact Specific Plans
Starting in 2025, new 401(k) and 403(b) plans established after the passing of SECURE 2.0 (December 29, 2022) must automatically enroll all eligible employees at a default contribution rate between 3% and & 10% of their salary, unless the employee selects an alternative rate, with an automatic escalation of 1% per year until they reach 10%.
The intent of the legislation passed is to make it easier for employees to participate in their retirement plan without procrastination. This may benefit employers as well, as increased participation can help pass nondiscrimination testing.
The purpose of the newly enacted legislation is to make it easier for workers to actively participate in their retirement plan so they can start contributions earlier. This may benefit employers as well, as increased participation can help plans pass nondiscrimination testing.
Starting in 2025, certain 401(k) and 403(b) plans must automatically enroll all eligible employees with a 3% deferral rate. The deferral rate will then increase 1% each year until it reaches 10%.
This new auto-enrollment provision requires that all employees receive a notice about this change.
Later, the provision will require an amendment to the retirement plan document.
Impacted businesses must enroll all eligible new hires and any existing eligible employees who haven’t made a choice yet (including the decision not to join) to your plan.
Not all plans are impacted by this change. A plan is generally exempt from this rule if:
- the plan started before December 29, 2022; or
- the business is less than three years old, or
- the business has 10 or fewer employees.
Employees can choose to opt out of the automatic enrollment within 90 days, and any previously made deferrals may be refunded to them.
Definiti will prepare the required amendments for affected plans, effective January 1, 2025, using “default” provisions. The defaults for this amendment include an initial deferral rate of 3%, increasing 1% annually up to 10% for all newly eligible participants and all current participants who have not entered into a salary deferral election (including an election not to defer).
If our clients would like anything other than the defaults selected, Definiti can adjust provided they meet the legislative requirements.
If you are uncertain of these changes or any other SECURE 2.0 requirements, refer to our SECURE Act resources or contact your Definiti Retirement Plan Consultant. If Definiti isn’t one of your plan’s trusted providers today, let’s talk. Call 1-888-912-3653 or email Call 1-888-912-3653 or email Call 1-888-912-3653 or email Call 1-888-912-3653 or email sales@definiti.com.
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Betsy brings more than two decades of ERISA counsel experience to her position at Definiti. Before joining the company, Betsy held a senior ERISA counsel role at Ameritas, served as an ERISA consultant with Ohio National and, most recently, was Manager of Retirement Plan Administration with Alliant Insurance Services. She holds a JD from the University of Cincinnati College of Law and a BA from the University of Dayton
BETSY SCHAAF, JD APM
ERISA Counsel
This material has been prepared for informational purposes only, and is not intended to provide legal, tax, or investment advice. Any tax-related discussion contained in this material is not intended or written to be used, and cannot be used, for (i) avoiding any tax penalties, or (ii) promoting, marketing, or recommending to any other party any transaction or matter addressed herein. This material does not provide fiduciary recommendations concerning investments or investment management; it is not individualized to the needs of any specific benefit plan or retirement investor, nor is it directed to any recipient in connection with a specific investment or investment management decision. Please consult your independent legal counsel and/or professional tax advisor regarding any legal or tax issues raised in this material.
