On January 10, the U.S. Department of the Treasury and the IRS issued preliminary guidance on SECURE 2.0’s retirement plan policies set to take effect in 2025. Here’s what employers and employees need to know.
Background
The need for savings is higher than ever, but gone are the days of generous pension plans and guaranteed retirement benefits. In recent years, federal lawmakers addressed this growing issue by introducing the SECURE 2.0 Act of 2022 (SECURE 2.0) to promote savings among the workforce.
A key part of SECURE 2.0 is Section 101, which requires automatic enrollment features for traditional 401(k) and 403(b) plans. On January 10, lawmakers released proposed regulations to provide guidance to plan administrators on the policies set to take effect for plans beginning in 2025.
Automatic Enrollment Requirements
As a result of SECURE 2.0, the IRS issued §414A outlining the requirements for retirement plan enrollment. Effective for plan years beginning after December 31, 2024, employers must automatically enroll employees in 401(k) plans with an initial minimum contribution rate of at least 3% but not more than 10%. This rate increases by 1% each year up to a maximum of 10% to 15%. Certain businesses are exempt from this requirement.
It is important to note that employers are required to inform employees about the auto-enrollment feature within a reasonable time period (typically between 30 and 90 days before the plan year begins). Employers also must provide details on the employees’ rights and how they can opt out or change contribution levels at their discretion.
Below are five key provisions in the preliminary policies regarding the automatic enrollment requirements:
- Defining Periods: The proposed regulations (REG-100669-24) specify that an employee’s first year of participation begins when the employee is first eligible to make contributions. The period is expected to end on the last day of the following plan year.
- Investment of Contributions: Internal Revenue Code §414A(b)(4) states that absent an employee investment election, default contributions to retirement plans must be invested in accordance with the U.S. Department of Labor’s regulations on qualified default investment alternatives under 29 CFR 2550.404c-5.
- Grandfathered Plans: Plans established before December 29, 2022 are not subject to the auto-enrollment requirements. The proposed policies provide detailed guidance on how mergers and acquisitions may handle various plans’ grandfathered statuses.
- Withdrawals: Employees automatically enrolled in a company’s 401(k) plan are permitted to make a permissible withdrawal of the default elective contribution if an election is filed within 90 days of the first default elective contribution.
- Exceptions: Exceptions apply to certain new or small businesses, as well as church and governmental plans. The updated guidance specifies how entities may identify themselves to qualify for the exception.
The proposed regulations are set to apply to plans beginning more than six months after the date final regulations are released. Until then, plan administrators are expected to operate under a reasonable and good faith interpretation of the statute. Failure to comply could result in penalties.
Benefits of Automatic Enrollment
Studies consistently show that automatic enrollment features lead to higher participation rates.1,2,3 Recent research confirms that employees enrolled by default in retirement plans had higher contribution rates compared to those under voluntary enrollment.4 The gap is wider for lower-income individuals.5
By encouraging workers to save, SECURE 2.0 aims to promote future financial stability. For example, a 3% contribution rate for a 24-year-old making $40,000 a year could yield a retirement balance of more than $200,000,6 effectively reducing future dependence on government assistance programs.
Employers may benefit from the enrollment requirements as well. In addition to increasing employee satisfaction, higher plan participation rates could increase a company’s actual deferral percentage (ADP) of lower-income employees. The ADP test is a nondiscrimination measure designed to help ensure that employers do not favor higher-compensated employees. Passing this test reduces a company’s need for corrective actions. In addition, small businesses implementing automatic enrollment may qualify for tax credits.
Drawbacks of Automatic Enrollment
As with any legislation, the new provisions are not without drawbacks. While educating employees on the default feature is a key requirement, some may fail to understand their ability to opt out. This could particularly jeopardize employees and their ability to repay existing debt obligations and potentially cause them to resort to alternative sources of cash, such as high-interest payday loans. The ability to liquidate funds easily (and without penalty) is crucial for many people, and automatic enrollment might hinder this ability.
Employers will likely face challenges as well. To comply with the provisions, companies may incur extra administrative costs to adapt existing benefits structures. Companies with employer match programs will need to make additional contributions to match higher plan participation rates. Further obstacles arise for multiemployer plans, as automatic enrollment may significantly increase plan complexity and costs.
Conclusion
SECURE 2.0’s automatic enrollment requirements represent a significant shift in the retirement landscape. Now is the time for businesses to review and revise their existing benefits structure to comply with the new policies. As the proposed regulations take effect, it is crucial for both employers and employees to be aware of the implications on their financial futures.
How Forvis Mazars Can Help
Forvis Mazars has a dedicated team focused on navigating the complexities of SECURE 2.0. Our Retirement Plan Consulting group can help employers and administrators with plan design, compliance, and employee education. Businesses and individuals can receive personalized investment strategies from our team of wealth advisors to assist them with their retirement savings.
If you have any questions or need assistance, please reach out to a professional at Forvis Mazars.
- 1“Automatic Enrollment in Retirement Savings Vehicles: Evidence from the Health and Retirement Study: Interim Report,” U.S. Department of Labor, September 2015.
- 2“Automatic Enrollment and Its Relation to the Incidence and Distribution of DC Plan Contributions,” Journal of Consumer Affairs, vol. 53, no. 3, September 2019.
- 3“Automatic Enrollment’s Long‑Term Effect on Retirement Saving,” troweprice.com, June 2022.
- 4“How America Saves 2024,” institutional.vanguard.com, June 2024.
- 5“Influencing Retirement Savings Decisions with Automatic Enrollment and Related Tools,” nber.org, October 2024.
- 6This information is for illustrative purposes only and is not intended as financial or investment advice. The approximation assumes a nominal investment growth rate of 6%, a starting salary of $40,000, and no changes in salary or contribution rate over a 40-year employment period. Actual return will vary based on market conditions and other factors. Consult a financial professional for personalized advice.