This is our eighth vlog about the changes to retirement plans under the SECURE Act 2.0 which became law in December 2022. You can find all of the other vlogs about other changes on our website.
Today, we will talk about the expansion of 401(k) and 403(b) automatic enrollment. In the past, automatic enrollment is not required for employers. Beginning in 2025, the SECURE Act 2.0 requires automatic enrollment for employers who have started new 401(k) or 403(b) plans after December 29, 2022. Plans established before December 29, 2022 will not be impacted. Also, there is an exception to the requirement for small businesses with 10 or fewer employees, new businesses less than 3 years old, churches, and governmental plans.
Within this requirement, those employers are required to auto-enroll their eligible employees into their retirement plan and eligible employees will be required to contribute an initial contribution rate from their paycheck. The initial contribution rate must be between 3% and 10%. Also, this includes the fact that the contribution rate has to be increased annually by 1% until a goal of 10% is reached, but not more than 15%. However, employees are allowed to elect to defer at a higher percentage such as 15% an 20% or defer at a lower percentage such as 3%, 2%, and 1%. That would waive the auto-enrollment rules because employees themselves elect to do so. Employees also can opt-out if they prefer not to participate by notifying their employer.
For those employees who are auto-enrolled and did not select their own investments, SECURE Act 2.0 directs that their contributions would be invested in the employer retirement plan’s qualified default investment option. That would continue until the employee elects to put their contribution in a specific investment option(s).
Please feel free to contact us anytime to discuss further if this applies to your situation.