Demystifying SECURE 2.0: Navigating Automatic Enrollment Changes in 401(k) Plans

Original Content by: Cameron Dabir, QKA, President of The Pension Source

As part of the SECURE 2.0 Act of 2022 (link), Section 101 expands automatic enrollment in certain qualified retirement plans. Congress’ intent is that even for those employees who are offered a retirement plan through their employer, many do not participate. But automatic enrollment in 401(k) plans significantly increases participation and should thus be more prevalent (in this case, mandated). As a result, Section 101 requires 401(k) plans to automatically enroll participants in their respective plans upon becoming eligible. Note, the employee can still opt out of being included if they desire.

The regulation requires that automatic enrollment adhere to the following:

  • The automatic enrollment amount is at least 3 percent of the employee’s compensation, but can not be more than 10 percent.
  • Each year, the amount is increased by 1 percent until it reaches at least 10 percent, but no more than 15 percent.
  • The annual increase must be effective on the first day of each plan year.

The above mentioned requirement is for all plans that were adopted after 12/29/22 and goes into effect starting with the 2025 plan year. That means if your 401(k) plan was adopted after 12/29/22, beginning in 2025 you will have to adopt this automatic enrollment provision. 

However, there are several exceptions. If you are one of the following, you will not have to adopt this provision:

  • Your business has 10 or fewer employees
  • You are a new business, defined as being in business for less than 3 years
  • You operate a church plan or a governmental plan 

If you are thinking, “This sounds like a lot of effort to manage the automatic enrollment percentages. What can I do?”

  • First, work with a trusted retirement third-party administrator (TPA), like The Pension Source. We are experts in all things retirement plans and ensure your plan remains in compliance and on track.
  • Second, you can adopt automatic enrollment and require that the percentage of compensation deferred is 10% from the start. This way, it reduces the amount of monitoring to ensure that the percentage is increasing by 1% each year for each participant. Remember, once a participant reaches the 10% threshold, the percentage does not need to continue increasing. 

If you are thinking, “I don’t want to have any automatic enrollment. What are my options?”

  • You can amend your plan to remove 401(k) elective deferrals altogether. Many people think that you are required to allow employees to defer a portion of their salary into the plan. This is not the case and is actually a more modern plan design feature. Instead, your plan can only include a contribution from the employer to the employees, typically made once per year. These types of employer contributions can be flexible, discretionary, and oftentimes can better reward the owner and/or longer tenured employees. You also reduce complexity by removing payroll integration requirements and active monitoring of deferrals being withheld and then deposited into the plan.
  • Instead of starting / continuing a 401(k) plan, ask us about adopting a defined benefit or cash balance plan instead. Despite what you may have read in the news, defined benefit plans continue to gain popularity amongst small businesses. They allow for significantly greater contribution amounts than 401(k) plans and potentially more flexibility with regards to who is included in the plan. For a successful small business owner with consistent profits and a significant annual tax burden, a defined benefit plan could be a fantastic option. It is critical though that you work with an expert (like us!) if you go this route.

In short, if you are worried about the coming mandate of automatic enrollment, do no fear. We are here to help. We will never force you into a “cookie-cutter” plan design that other providers may push. Instead, we are here to listen to your desires and tailor a tax-advantaged retirement plan to your liking.

Our passion is improving retirement outcomes for small business owners and their employees. Reach out if you’d like to learn more at [email protected].