SECURE 2.0 Mandates Automatic Enrollment in 401(k)s & 403(b)s
As an HR professional, you might act as the plan administrator for retirement benefits and work closely with a third-party administrator (TPA) to ensure contributions and distributions are ported correctly. SECURE Act 2.0, or Setting Communities Up for Retirement Enhancement Act 2.0, will inevitably affect how your organization offers retirement benefits.
One of the major provisions of SECURE 2.0 mandates that employers automatically enroll eligible employees in employer-sponsored 401(k) or 403(b) plans. Let’s break down how this provision works, who it affects, employer responsibilities, and how to prepare for automatic enrollment.
What Is SECURE 2.0?
The SECURE Act is federal legislation designed to encourage Americans to save more actively for their retirement. It has many provisions geared toward how employers should incentivize employees to participate in retirement planning. It also contains provisions speaking directly to individuals about changes to standard retirement plan rules. Some of these changes include adjusting distribution penalties, broadening hardship withdrawal allowances, and more.
The SECURE Act was passed in 2019 to encourage individuals to save more for retirement and incentivize employers to improve or begin offering retirement benefits. In 2022, the federal government passed SECURE 2.0, which expanded on the original legislation and changed how small to midsized employers offer retirement benefits. It also made clerical and administrative fixes to the original language of the SECURE Act.
SECURE 2.0 Requires Some Employers to Enroll Eligible Employees in Retirement Plans Automatically
What is SECURE 2.0’s automatic enrollment provision?
- SECURE 2.0 includes an automatic enrollment provision (Section 101) which is a mandate for employers to automatically enroll eligible employees in employer-sponsored 401(k) or 403(b) plans.
- This provision sets employee contributions automatically at 3%.
- A later section covers this in more depth
When does the automatic enrollment provision go into effect?
- Employers must be prepared for their eligible employees’ automatic enrollment in 401(k) and 403(b) plans by the effective date of December 31, 2024.
Who is affected by SECURE 2.0’s automatic retirement plan enrollment provisions?
- SECURE 2.0’s automatic enrollment rule affects employers that offer 401(k) or 403(b) retirement plans and employees who are eligible to enroll in employer-sponsored 401(k) and 403(b) plans.
- All current 401(k) and 403(b) plans are grandfathered.
- So if an employer plans to begin offering a 401(k) or 403(b) plan, this provision will apply
- The exceptions to the automatic enrollment provision are:
- Small businesses with 10 or fewer employees
- Businesses that have been in business for less than 3 years
- Church plans
- Governmental plans
Are there required amounts employees must contribute if they are automatically enrolled?
- Initially, employees who are automatically enrolled will contribute at least 3% but not more than 10%.
- The initial employee contribution amount increases by 1% each year until it reaches at least 10%.
- The amount will not increase to exceed 15%, so if an employee is automatically enrolled at 10% and 6 years pass, the contribution amount will stabilize at 15%.
Can employees change automatic enrollment contribution amounts?
- Employees can request to change contribution amounts.
- How often these amounts can be changed is determined by the employer’s plan, which could range from annually, to quarterly, even to each pay period
Is the federal government offering incentives to start a retirement plan?
- SECURE 2.0 provides that employers starting up retirement plan offerings for their employees may be eligible to receive federal support for administrative costs
- Incentives are intended to offset the employer-facing costs of starting and administering a retirement plan
Does the automatic enrollment provision impact how qualifying life events or open enrollment works?
- Employers must ensure employees are automatically enrolled in applicable plans when they become eligible. Eligibility to participate is determined by the employer.
- Example: If an employee becomes eligible after 90 days from their start date, employers may then automatically enroll their employee in an applicable retirement plan.
- Automatic enrollment does not impact whether or not employees can change benefits elections due to qualifying events.
Can employees opt out of automatic enrollment?
- Employees can choose not to participate in an employer-sponsored retirement plan by opting out.
- However, in order to give employees the opportunity to opt-out, employers may benefit from sending notices beforehand to inform employees of the automatic enrollment process and offer the option to decline enrollment.
What does SECURE 2.0’s automatic enrollment provision change for employers?
- Automatic enrollment may impact the plan administrator’s (which, for SMBs, is usually the HR professional) method of enrolling employees in retirement plans as they become eligible.
- Employers offering 401(k) or 403(b) plans should consider having automatic enrollment administrative structures in place to abide by SECURE 2.0’s requirements.
How can HR manage automatic enrollment in retirement plans?
- HR professionals can prepare to streamline automatic enrollment in employer-sponsored retirement plans by auditing current benefits enrollment processes.
- Example: do employees currently enroll in retirement benefits upon hire, after a certain amount of time has passed, or during open enrollment?
- Determine the natural place for automatic enrollment within current enrollment processes.
- Example: If employees elect retirement benefits during onboarding, then HR professionals may find it best to include a notice about automatic enrollment in the onboarding stage.
- Institute a benefits administration feature of an all-in-one HRIS to manage benefits enrollment and send notices to eligible participants.
- By using an HRIS that natively houses payroll and benefits administration, the plan administrator can much more easily ensure retirement contributions are withheld from checks each pay period.
- Plan administrators should work closely with TPAs like Ubiquity to administer retirement benefits.
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