The SECURE Act 2.0 introduces an automatic enrollment requirement for new 401(k) plans adopted after December 29, 2022. This requirement must be in place starting with plan years beginning after December 31, 2024. Here are the key details:
- Initial Contribution Rate: New employees must be automatically enrolled in the retirement plan at a contribution rate of at least 3% of their salary.
- Automatic Escalation: The contribution rate must increase by 1% each year until it reaches at least 10%, but it cannot exceed 15%. For instance, if an employee starts with a 3% contribution, it will increase to 4% in the second year, 5% in the third year, and so on, until it reaches the target rate within the 10-15% range.
- Employee Opt-Out: Employees have the option to opt out of the automatic enrollment or choose a different contribution rate. This flexibility allows employees to manage their retirement savings according to their personal financial situations.
- Exemptions: Certain plans and employers are exempt from this requirement. These exemptions include small businesses with 10 or fewer employees, new businesses less than three years old, church plans, and governmental plans.
To avoid the complications of the annual increases, RPG advises plan sponsors to set the Initial Contribution Rate (#1 above) at 10%. This incentivizes employees to make a 401(k) contribution election, whether it be their desired contribution percentage or opting out.
The automatic enrollment feature aims to increase participation rates in retirement savings plans and ensure that more employees are adequately prepared for retirement.