Automatic Enrollment Provisions May Impact Your 401(k) Plan
Beginning January 1, 2025, most new 401(k) plans must include an automatic enrollment feature. Newly-eligible employees will be automatically enrolled in the plan at a contribution rate of at least 3% and not more than 10%. This contribution rate will be escalated at the beginning of each plan year by 1% until it reaches 10% and not more than 15%.
Automatic enrollment provisions apply to plans established after December 29, 2022. For purposes of this, “established” means the date on which the plan was adopted. That means that a new 401(k) plan effective January 1, 2023 that was adopted November 15, 2022 would not be subject to the new rules. Plans established prior to December 29, 2022 are grandfathered and currently exempt from mandatory automatic enrollment requirements.
Automatic enrollment does not mean mandatory enrollment. Employees can opt out of the plan by proactively making an election not to participate in the plan or by electing a different contribution rate than the default percentage.
Why is automatic enrollment a trend?
It’s no secret that Americans are poor savers. Most of us would much rather spend money on current needs and wants than save for the future. That’s where automatic enrollment comes in – it’s more convenient to save if retirement plan contributions automatically come out of an employee’s paycheck. It takes effort for the employee to opt out of the plan, just like it takes effort for the employee to enroll in the plan.
Automatic enrollment in retirement plans isn’t new. You may already be familiar with these types of provisions, as more and more states require private employers to either offer a retirement plan for their employees or facilitate the state-mandated plan, most of which include some sort of automatic contribution feature.
What are the employer’s responsibilities?
Employers are required to provide employees with information about the plan, including the automatic contribution rate, investment options, and the procedure for opting out of participation.
There are a handful of plans that are exempt from the automatic enrollment requirement. These include 401(k) plans established by new businesses which have been in existence for less than three years, small businesses with 10 or fewer employees, church plans, and governmental plans.
Where did this change come from?
The SECURE 2.0 Act was signed into law in late 2022 and made sweeping changes to retirement plans both for companies and individuals. We’ll be discussing additional changes affecting 401(k) plans in a future newsletter.
What do I do now?
If your organization has a 401(k) plan that falls under these requirements, visit with your plan’s administrative firm for more information. If your organization utilizes TAG Resources, they have indicated they will be sending information to affected clients within the next couple of months.
If your plan is not required to include automatic enrollment provisions but you would like to do so, visit with your plan’s administrative firm to add those provisions to your plan’s document.
If you’re considering offering a new 401(k) plan, be aware that these provisions will apply to your new plan. Even though the requirement only applies to plans beginning January 1, 2025, it’s likely that even plans established in 2024 will begin with automatic enrollment provisions this year rather than switching a few months from now.
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