How 401(k) automatic enrollment can benefit your employees and your business

How 401(k) automatic enrollment can benefit your employees and your business Dec 11, 2023 12:00:00 AM SECURE 2.0 mandates automatic enrollment for newer plans. Let’s look at the benefits for your business and your employees. Let’s take a look at how the new default for 401(k) plan enrollment can be a win-win for your business and your employees. SECURE 2.0 makes automatic enrollment the default Under the SECURE 2.0 Act, automatic enrollment is a requirement for plans with an initial effective date on or after December 29, 2022. The provision itself is effective on January 1, 2025. Additionally, businesses in existence for less than three years, as well as those with 10 or fewer employees, are exempt. The provision: Requires plans to automatically enroll employees at a default rate between 3% and 10%. Must offer participants who are automatically enrolled the ability to request a withdrawal of their contributions within 90 days of their first contribution. As before, must allow employees to change their contribution rate or opt out of the plan at any time. Even though the Act doesn’t require implementation until January 1, 2025, you may want to get ahead of the curve and implement automatic enrollment now. It can save you operational stress while showing your employees that you care about their savings. A win for your business Automatic enrollment requires some upfront implementation, but there are ongoing benefits to your business as a result. Increased plan participation: According to the IRS, automatic enrollment can increase employee participation, which may result in various positive outcomes. More plan participation could result in increased tax deductions if you offer employer-matching contributions. Higher participation may increase the likelihood of your plan passing nondiscrimination testing since, by default, automatic enrollment does not favor specific employees. Help attract and retain talent: A 401(k) plan with high participation could prove to be a crucial aspect in building a strong workforce. Our research has found that about 50% of employees would be enticed to leave their jobs for a 401(k) plan at another employer. You may be able to retain more employees if they see the value of your benefits package, specifically your 401(k)—and automatic enrollment makes participating easier for everyone. Automatic enrollment tax credit: Adding automatic enrollment, even if your plan isn’t mandated to, can provide you with a tax credit. Employers that add automatic enrollment to a new or existing plan can take advantage of a $500 tax credit. Employers can claim this tax benefit for up to three tax years if they have 100 or fewer eligible employees. Embracing automatic enrollment can yield positive results for your business, but as we’ll see next, the results may be even more meaningful for the financial lives of your employees. A win for your employees Simply put, automatic enrollment makes it easier for employees to save for retirement. That’s the whole point of the SECURE 2.0 Act. And the data speaks for itself: Recent industry data reported by BenefitsPRO found that plans with automatic enrollment saw a 93% participation rate compared with a participation rate of 70% for plans with voluntary enrollment. The National Association of Plan Advisors reported that automatic enrollment helps close the retirement savings gap for communities of color, showing far greater active participation rates within minority groups when employees are automatically enrolled. By changing the default to automatically enroll staff, you can expect more employees will save for retirement. That can be life-changing for many who may never otherwise have started. How does automatic enrollment under SECURE 2.0 actually work? Beginning in 2025, the SECURE 2.0 Act makes Eligible Automatic Contribution Arrangement (EACA) the default for all 401(k)s created December 29, 2022 or later, again with a few exceptions. That means for those plans, employees’ deferrals must be set between 3% and 10%. Newly auto-enrolled participants must also have a 90-day window to request their funds back. You can also consider a Qualified Automatic Contribution Arrangement (QACA) by way of a Safe Harbor 401(k) plan. That means you’ve already committed to, among other things, a specific threshold of employer contributions. Beginning in 2025, here are the options for newly-created plans: Beginning in 2025, for all plans with effective dates of December 29, 2022 or later Eligible Automatic Contribution Arrangement (EACA) Qualified Automatic Contribution Arrangement (QACA) Employees enrolled at preset contribution rate between 3% and 10% ✓ ✓ Employees can opt out or change contribution rate ✓ ✓ Employees can request refunds of deferrals within first 90 days ✓ ✓ Requires employer contributions (i.e., Safe Harbor) and accelerated vesting schedule ✓