What is 401(k) automatic enrollment?

What is 401(k) automatic enrollment?

401(k) automatic enrollment is a feature that allows employers to enroll employees into the company's 401(k) retirement plan automatically at a default contribution rate, unless the employee chooses to opt out or select a different contribution rate. 

What are the benefits of automatic enrollment for employers?

Automatic enrollment can lead to increased plan participation, potentially resulting in higher tax deductions if employer-matching contributions are offered. It may also improve the likelihood of passing nondiscrimination testing and enhance the company's ability to attract and retain talent. Additionally, employers that implement automatic enrollment may be eligible for a $500 tax credit for up to three years if they have 100 or fewer eligible employees. 

What are the benefits of automatic enrollment for employees?

Automatic enrollment helps to simplify the process of saving for retirement, by leading to higher participation rates. According to industry data, plans with automatic enrollment have a 93% participation rate compared to 70% for plans with voluntary enrollment. This feature also helps close the retirement savings gap for communities of color, or other under-represented groups, as higher participation rates are observed within under-represented groups when employees are automatically enrolled. 

How does the SECURE 2.0 Act affect automatic enrollment?

The SECURE 2.0 Act mandated that 401(k) plans with an initial effective date on or after December 29, 2022, must implement automatic enrollment starting January 1, 2025. New plans are required to enroll employees at a default rate between 3% and 10%. Employees who are automatically enrolled must be given the option to withdraw their contributions within 90 days of their first contribution. Employees can also change their contribution rate or opt out of the plan at any time. 

Are there any exemptions to the automatic enrollment requirement under the SECURE 2.0 Act?

Yes, businesses that have been in existence for less than three years and those with 10 or fewer employees are exempt from the automatic enrollment requirement under the SECURE 2.0 Act. 

How can employers implement automatic enrollment in their 401(k) plans?

Employers can implement automatic enrollment by setting a default contribution rate for employees who do not make an active election. It's important to communicate the automatic enrollment feature to employees, including their ability to opt out or change their contribution rate. Partnering with a digital 401(k) plan provider can streamline the implementation process and enhance the employee experience. 

Implementing automatic enrollment in a 401(k) plan can be a beneficial strategy for both employers and employees, promoting increased retirement savings and compliance with legislative requirements.