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Man on a moving sidewalk symbolizing ease of automatic enrollment in retirement plans -- Key Information on Mandatory Auto-Enrollment for New 401(k) and 403(b) Plans
Insight • July 2, 2024
5 min. Read

Key Information on Mandatory Auto-Enrollment for New 401(k) and 403(b) Plans

Secure Act 2.0 contains a new provision related to auto-enrollment in 401(k) and 403(b) plans. Here’s what you need to know.

By
Retirement Solutions Lead

Many Americans do not save for retirement or do not save enough. Automatically enrolling employees in their workplace retirement plan, however, has proven to increase plan participation and achieve better retirement savings outcomes. Now, Secure Act 2.0 mandates employees to be “auto-enrolled” into their 401(k) or 403(b) plan.

Historically, employees had to make an “active” choice to participate in their 401(k) plan by affirmatively electing to make salary deferral (pre-tax, Roth, after-tax) contributions. This was accomplished by filling out an enrollment form or an online application. Unfortunately, many employees, for a variety of reasons, choose not to participate. Enter automatic enrollment which has both transformed and benefited the way millions of Americans save for their retirement by boosting plan participation and savings rates.

Automatic enrollment (also referred to as a "negative election" or “automatic contribution arrangement” as the IRS calls it) serves as a program designed to increase 401(k) employee participation and saving rates. Once an employee is auto-enrolled, salary deferral contributions are automatically deducted (by dollar amount or percentage) from pay, unless the employee specifically elects to opt out of participation.

The appeal of adding auto-enrollment to a 401(k) plan includes increased participation, taking advantage of employer-matching contributions, improved retirement preparedness and outcomes, reduced risk of outliving savings, default investment options, and improved financial wellness, to name a few. The Plan Sponsor benefits too, by raising the average deferral percentage (ADP) for non-highly compensated employees for the purposes of nondiscrimination testing. The ADP test measures the elective deferrals of highly compensated employees for nondiscrimination. Notably, adhering to the new automatic enrollment mandate for many Plans, is it will qualify them to potentially claim the automatic enrollment tax credit.

Auto-enrollment, however, is not a panacea; potential disadvantages include increased employee education, higher costs (i.e., through an employer-matching contribution), smaller account balances, and increased administrative complexity. A Plan Sponsor should therefore weigh their business needs against the advantages and (potential) disadvantages and see where they land. Importantly, a Plan Sponsor historically has had the option to implement an auto-enrollment program feature ——that is, until enactment of Secure Act 2.0.

There are three types of auto-enrollment available: automatic contribution arrangement (ACA), qualified automatic arrangement (QACA), and eligible automatic contribution arrangement (EACA). Each type includes somewhat different rules and requirements. Reviewing the differences is outside the scope of this article. Instead, we’ll focus specifically on the EACA.

Section 101 of Secure Act 2.0 requires new 401(k) and 403(b) plans established after December 29, 2022 (The Secure Act 2.0 “enactment date”) to include an EACA. Furthermore, the IRS published guidance in Notice 2024-2 clarifying when a 401(k) or 403(b) plan is considered “established” for the purposes of satisfying the new EACA mandate.

If applicable, an EACA must be included in a 401(k) or 403(b) plan for years beginning after December 31, 2024 (for most plans, January 1, 2025). Importantly, any 401(k) or 403(b) plan “established” on or after December 29, 2022, is considered a new plan and therefore must auto-enroll employees through an EACA. Thus, for those plans “established” on or after Secure 2.0 enactment date should either begin as an “auto-enrollment” plan or will need to be converted to an automatic-enrollment plan in 2025. Said another way, a plan established on or after the December 29, 2022, enactment date needs to be converted to an automatic plan unless an exception applies.

What plans are “established” before December 29, 2022?

IRS Notice 2024-02 clarifies the conditions under which a 401(k) or 403(b) plan is established on or after December 29, 2022. If applicable, an EACA must be included in plan years beginning after December 31, 2024.

The Notice states the adoption date determines whether a plan is subject to mandatory automatic enrollment. A 401(k) or 403(b) plan adopted before December 29, 2022, but not effective until after December 29, 2022, is not subject to mandatory auto-enrollment. Therefore, it’s the plan’s adoption date—not effective date that governs. The Notice also provides an example (Q&A-1) where a 401(k) is adopted on October 3, 2022 (pre-enactment), with an effective date of January 1, 2023 (post-enactment). Which date is used to determine the date the plan was “established”? The Notice states the 401(k) plan is grandfathered because it was established prior to December 29, 2022, even though it’s not effective until afterward. It appears the key date for 401(k) plans is the date employee salary reduction contributions, formally referred to as a cash or deferred arrangement (CODA), are adopted.

Criteria for 403(b) plans are more liberal. Here the key date is the effective date of the entire plan—not the (plan) effective date or adoption date of a CODA (Q&A-5). Therefore, a 403(b) plan established prior to the Secure 2.0 enactment date is grandfathered regardless of when the plan’s CODA feature was adopted. In other words, a 403(b) plan is grandfathered if it was established prior to December 29, 2022, regardless of whether it provided for salary reduction contributions when initially adopted.

All plans established prior to December 29, 2022, are exempt, which includes 401(k) plans that were established and include a CODA (before December 29, 2022) and 403(b) plans established before December 29, 2022. However, there is no corresponding requirement for a 403(b) plan to have permitted deferrals prior to December 29, 2022.

What you need to know about the EACA mandate

New 401(k) and 403(b) plans are required to automatically enroll employees beginning in plan years after December 31, 2024 (e.g., 2025 for calendar year plans). Once effective, 401(k) and 403(b) plans will be required to automatically enroll employees at a minimum 3% of compensation, but not more than 10%, and automatically increase salary deferral rates by 1% annually up to at least 10%—up to a maximum of 15% if chosen by the plan. Notably, employees still have ability to opt out of plan participation or choose a different deferral rate.

  • Affects 401(k) and 403(b) plans including the new Starter 401(k). (The Starter 401(k) will be covered in a future article.)
  • Employees will be automatically enrolled once plan eligibility requirements are satisfied.
  • Auto-enrollment requires an employee initial deferral rate between 3% and 10% of compensation with annual escalation (at a minimum of 1% per year) until the deferral rate reaches between 10% and 15% of compensation. An initial default deferral rate of 10% of pay eliminates the mandatory annual escalation provision, which should somewhat reduce administrative complexity.
  • If an investment choice has not been made, employee salary deferrals will automatically be invested in the plan’s qualified default investment alternative (QDIA)—generally a target date, balanced fund, or managed account.
  • Does not apply to a multiple employer plan (MEP) or pooled employer plan (PEP) as a whole. It does, however, apply to those employers who participate in a MEP or PEP as if they were adopting a single employer plan on or after the December 29, 2022.
  • An employee can elect to change their deferral rate at a frequency allowed under the terms of the plan.
  • The plan must provide a notice that details the employee’s right to opt out of the plan or elect a different deferral rate and describes the default investment selected for those employees that fail to make an investment election. Accordingly, most plans subject to these automatic enroll requirements will need to supply eligible employees with a notice at least 30 days before the 2025 plan year begins, which is December 2, 2024 for a calendar year plan.
  •  Within 90 days of their first deferral an employee must have an opportunity to elect to withdraw all their deferrals (made to the plan), plus earnings.

Several exceptions apply including existing 401(k) and 403(b) plans, church plans, government plans, SIMPLE 401(k) plans, new businesses that have been existence for less than three years or plans for small employers with 11 or fewer employees.


“Secure Act 2.0 (Section 101) requires 401(k) and 403(b) plans to automatically enroll participants in the respective plans upon becoming eligible (and the employees may opt out of coverage). The initial automatic-enrollment amount is at least 3% but not more than 10%. Each year thereafter that amount is increased by 1% until it reaches at least 10%, but not more than 15%. All current 401(k) and 403(b) plans are grandfathered. There is an exception for small businesses with 10 or fewer employees, new businesses (i.e., those that have been in business for less than three years), church plans, and governmental plans. Section 101 is effective for plan years beginning after December 31, 2024.”

Source: Senate Finance Committee


Preparing for the Automatic Enrollment Mandate

  • Employers who have or are looking to adopt a 401(k) or 403(b) plan (established after the enactment date) should consider whether it’s more advantageous to start as an “automatic” plan or to wait until 2025 to make the change.
  • Employers should partner with their plan recordkeeper and other service providers to become better educated regarding automatic enrollment requirements, employee education, and services offered.
  • If all eligible employees affirmatively elect plan participation, then auto-enrollment and escalation do not apply to any participants.

Questions? Please contact your Lord Abbett representative at 888-522-2388.

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A 401(k) plan is a qualified plan that includes a feature allowing an employee to elect to have the employer contribute a portion of the employee’s wages to an individual account under the plan. The underlying plan can be a profit-sharing, stock bonus, pre-ERISA money purchase pension, or a rural cooperative plan. Generally, deferred wages (elective deferrals) are not subject to federal income tax withholding at the time of deferral, and they are not reported as taxable income on the employee’s individual income tax return. A safe harbor 401(k) plan is similar to a traditional 401(k) plan, but, among other things, it must provide for employer contributions that are fully vested when made.

A 403(b) plan, also known as a tax-sheltered annuity plan, is a retirement plan for certain employees of public schools, employees of certain Code Section 501(c)(3) tax-exempt organizations, and certain ministers. A 403(b) plan allows employees to contribute some of their salary to the plan. The employer may also contribute to the plan for employees. A safe harbor 403(b) plan is similar to a traditional 403(b) plan, but, among other things, it must provide for employer contributions that are fully vested when made.

A Roth IRA is a tax-deferred and potentially tax-free savings plan available to all working individuals and their spouses who meet the IRS income requirements. Distributions, including accumulated earnings, may be made tax-free if the account has been held at least five years, and the individual is at least 59½, or if any of the IRS exceptions apply. Contributions to a Roth IRA are not tax-deductible, but withdrawals during retirement are generally tax-free.

A SIMPLE IRA is a retirement plan that may be established by employers, including self-employed individuals. The employer is allowed a tax deduction for contributions made to the SIMPLE. The employer makes either matching or nonelective contributions to each eligible employee’s SIMPLE IRA, and employees may make salary deferral contributions.

A Traditional IRA is an individual retirement account (IRA) that allows individuals to direct income, up to specific annual limits, toward investments that accumulate tax-deferred. Contributions to the traditional IRA may be tax-deductible depending on the taxpayer’s income, tax-filing status, and other factors.

The information is being provided for general educational purposes only and is not intended to provide legal or tax advice. You should consult your own legal or tax advisor for guidance on regulatory compliance matters. Any examples provided are for informational purposes only and are not intended to be reflective of actual results and are not indicative of any particular client situation.