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 and can lead to higher participation rates. This feature also helps close the retirement savings gap for under-represented groups as higher participation rates are observed within those 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.
Does my plan have automatic enrollment?
To see whether your plan automatically enrolls employees, and at what default rate, go to 401(k) > Plan Settings > Employee Settings in the Plan Sponsor Dashboard.
Want to add, remove, or change automatic enrollment?
Whether you can change automatic enrollment depends on when your plan was set up.
Plans established on or after December 29, 2022: SECURE 2.0 requires most of these plans to automatically enroll eligible employees, starting with plan years that begin in 2025. If this applies to your plan, automatic enrollment can't be removed.
Exceptions: businesses that have existed for fewer than 3 years, businesses with 10 or fewer employees, and church and government plans don't have to follow the rule. If your business grows past these limits, the requirement may apply later.
Any change to automatic enrollment changes your plan design and usually requires a plan amendment. To request one, contact your CSM or plansupport@betterment.com with the change you want and when you want it to take effect. We'll confirm whether your plan is eligible before making any changes.
What if an employee wants to stop contributions after being auto-enrolled?
Employees can set their deferral rate to 0% themselves. See How can employees opt out of 401(k) contributions? If they're within the refund window (90 days from auto-enrollment), see Understanding Eligible Automatic Contribution Arrangements (EACA).