The U.S. Treasury Department and the IRS recently unveiled proposed regulations that address a key provision of the SECURE 2.0 Act, mandatory automatic enrollment for newly established 401 (k) and 403(b) retirement plans. This requirement aims to boost retirement savings among employees by making it easier for them to participate in these plans, as automatic enrollment ensures they are signed up unless they opt out. This guidance is a crucial step in providing clarity to employers and administrators as they prepare to implement these changes.
The automatic enrollment requirement is one of the most significant provisions of SECURE 2.0, which was enacted to address the growing retirement savings gap in the United States. By simplifying participation, the aim is to make retirement savings more accessible and ensure higher participation rates across the workforce, particularly for younger and less financially secure employees.
Key Takeaways
The IRS has released proposed regulations on automatic enrollment under SECURE 2.0, aiming to boost retirement savings among employees by making it easier for them to participate in employer-sponsored plans.
- All newly established 401(k) and 403(b) plans must automatically enroll employees unless they opt out, with a default deferral rate of 3% to 10% of salary.
- Small businesses with fewer than 10 employees or those operating for less than three years are exempt from the mandatory automatic enrollment requirement.
- The proposed regulations also clarify the treatment of rehired employees and mergers, providing guidelines for employers and plan administrators to ensure fairness and compliance.
Key features of the automatic enrollment provision
Mandates for new 401(k) and 403(b) plans: Under the proposed regulations, all newly established 401(k) and 403(b) plans must automatically enroll employees unless they opt out. This enrollment would be set at a default deferral rate of 3% to 10% of salary, which can increase annually by up to 1% until it reaches a maximum of 10% to 15%.
These automatic contributions will be invested in qualified default investment alternatives (QDIAs), typically target-date funds, which adjust based on the participant’s age and projected retirement date.
This provision is designed to simplify the process of enrolling employees in retirement plans, encouraging participation by reducing the need for active decisions. Historically, many workers did not participate in employer-sponsored retirement plans due to inertia or lack of understanding, and automatic enrollment aims to overcome this barrier.
Research has shown that automatic enrollment can significantly increase participation rates, often leading to a participation rate of over 90%, compared to the 70% seen in plans without automatic enrollment.
Exemptions for small and new businesses: While the automatic enrollment rule applies to most employers, SECURE 2.0 provides exemptions for certain small businesses. Specifically, businesses that have been operating for less than three years are exempt from this requirement. The rationale behind this exemption is that smaller, newer businesses may face significant administrative and financial burdens when trying to implement automatic enrollment systems, especially if they have limited resources.
Additionally, businesses with fewer than 10 employees are also excluded from the mandatory automatic enrollment requirement. This gives small businesses more flexibility in managing their retirement plans while still being able to offer benefits to their employees. These exemptions are intended to reduce the complexity and cost of implementing retirement savings programs in small businesses, encouraging them to continue offering plans without being unduly burdened by administrative requirements.
Special cases: Rehired employees and mergers
The treatment of rehired employees and mergers is an important aspect of the new automatic enrollment regulations. These scenarios present unique challenges for employers and plan administrators, requiring clear guidelines to ensure fairness and compliance with the SECURE 2.0 provisions.
Treatment of rehired employees
The proposed regulations also clarify the treatment of rehired employees in the context of automatic enrollment. Under the SECURE 2.0 framework, if an employee is rehired after a period of termination, they may be automatically reenrolled at the same default contribution rate they were enrolled in before their termination. However, if the employee was not enrolled in a retirement plan previously, they will be treated as a new employee and subject to automatic enrollment at the default deferral rate.
This clarification is particularly important for companies that have a high turnover rate or frequently rehire employees. It ensures that rehired workers are not overlooked in the automatic enrollment process, aligning with SECURE 2.0’s broader goal of boosting participation in retirement savings plans.
Implications for merged and spin-off plans
Mergers and spin-offs of retirement plans are also addressed in the proposed regulations. When two plans merge, the resulting plan is not considered new for SECURE 2.0 compliance, as long as the original plans already included automatic enrollment.
Similarly, a new plan created during a business spin-off only faces automatic enrollment requirements if it qualifies as a “new” plan. This provision reduces complications for businesses changing while supporting employee participation in retirement savings.
Communication and administration flexibility
The IRS proposed regulations also outline the notice requirements for automatic enrollment plans. Plan sponsors are required to notify participants about the automatic enrollment feature and provide details about the default deferral rate, investment options, and how to opt out if they choose. Participants must be allowed to withdraw their contributions within 90 days of the first automatic deposit being made into their account, giving them time to reconsider their participation.
Additionally, the regulations allow plan administrators to combine notices, such as automatic enrollment notices and default investment notices, into one document, simplifying the communication process for employees. This streamlined approach will help employers comply with the notice requirements while minimizing the paperwork burden for employees.
Simplifying administrative burdens
The proposed regulations also recognize the challenges employers face when administering retirement plans, particularly for small businesses. To reduce the administrative burden, SECURE 2.0 allows employers to send a simplified annual reminder notice to unenrolled participants, instead of the full set of notices typically required for retirement plans. This provision helps employers save time and resources while still ensuring that employees are informed about their rights and options under the plan.
In addition, SECURE 2.0 permits plan sponsors to bundle notices together, reducing the amount of paperwork that employees must navigate. This is especially important for smaller businesses that may have limited administrative resources.
Effective date and implementation
The proposed regulations are scheduled to take effect on January 1, 2025, for all retirement plans that are newly established or subject to the automatic enrollment provisions. However, employers will have time to prepare and implement the necessary changes. Until the final regulations are issued, businesses can rely on a good-faith interpretation of the law and begin adjusting their plans to meet the SECURE 2.0 requirements.
Employers must begin integrating automatic enrollment features into their retirement plans, whether 401(k)s or 403(b)s, by the start of the 2025 plan year. This timeline gives businesses over a year to make necessary adjustments, including adjusting plan documents, revising employee communications, and setting up systems for automatic deferrals.
Potential benefits for workers
The automatic enrollment provision is expected to have a positive impact on retirement savings in the U.S. Studies show that employees are far more likely to save for retirement when automatically enrolled in a plan. Automatic enrollment has been shown to increase participation rates from around 70% to over 90%, helping millions of workers take better control of their financial futures.
This provision is particularly important for younger employees and those from lower-income households, who may otherwise overlook retirement savings. By making the process easier, SECURE 2.0 ensures that more employees can save for retirement, increasing financial security for future generations.
A step toward greater retirement security
The IRS’s proposed regulations on SECURE 2.0’s automatic enrollment are designed to improve access to retirement savings and increase employee participation. These guidelines simplify the process, ensuring more workers are enrolled in retirement plans for a secure financial future.
With the automatic enrollment requirement starting in 2025, employers must act to integrate these changes into their plans. The IRS’s guidance helps businesses navigate the new law and support long-term financial security for employees.
The proposed regulations align with SECURE 2.0’s broader goal of increasing retirement savings and reducing financial insecurity for American workers. Employers must stay informed and prepare for the 2025 deadline.
