Reminder for Sponsors of New 401(k) Startup Plans
Automatic Enrollment Requirement Starting in 2025
As the retirement landscape continues to evolve, it is essential for sponsors of new 401(k) startup plans to stay updated on compliance requirements. A critical change that all plan sponsors need to be aware of is the mandatory automatic enrollment rule that will come into effect starting in 2025. This article will outline what you need to know about this requirement and how to prepare for it.
Background: Secure Act 2.0
The mandate for automatic enrollment is part of the SECURE Act 2.0, a legislative package passed to expand retirement savings opportunities and promote broader participation in employer-sponsored plans. Among its many provisions, this act specifically impacts 401(k) plans initiated after January 29, 2022.
Key Requirement: Automatic Enrollment
Under the new regulation, 401(k) plans established after January 29, 2022, must include an automatic enrollment feature starting in 2025. Here are the primary details:
– Initial Enrollment Rate: New participants must be enrolled automatically at a minimum contribution rate of 3% of their salary. This rate can be set as high as 10%.
– Automatic Escalation: Plans are required to include an automatic escalation feature, which increases the participant’s contribution rate by 1% annually until it reaches at least 10% but no more than 15%.
– Opt-Out Option: Employees will still have the right to opt out of the automatic enrollment or adjust their contribution rates.
Exemptions
Certain plans are exempt from this requirement, including:
– Small businesses with 10 or fewer employees.
– New businesses that have been in operation for less than three years.
– Church and governmental plans.
Why This Matters
Automatic enrollment has been shown to significantly boost participation in retirement savings plans, ensuring more employees are prepared for retirement. For plan sponsors, the 2025 deadline means taking action now to update plan designs, communicate changes effectively with employees, and help to provide a smooth integration of the new requirement.
Steps for Plan Sponsors
- Review Current Plan Provisions: Confirm whether your 401(k) plan falls under the new automatic enrollment rule.
- Consult with Plan Advisors: Work with financial and legal advisors to make necessary adjustments and remain compliant.
- Employee Communication: Plan for clear and informative communication with employees about the changes and their options.
- Technical Implementation: Coordinate with your payroll provider or plan administrator to set up the automatic enrollment and escalation features.
Final Thoughts
The 2025 automatic enrollment requirement is an important development that aims to bolster the retirement security of American workers. Sponsors of 401(k) plans launched after January 29, 2022, should act promptly to ensure they meet the compliance deadline. By starting preparations now, you can help to facilitate a seamless transition and maintain your plan’s compliance while enhancing the retirement readiness of your employees.
Important Disclosure: You should not assume that any information provided serves as the receipt of, or as a substitute for, personalized investment advice from Waverly Advisors, LLC (“Waverly”). This information should be used as a reference only and is not intended to provide tax or legal guidance. Talk to your Waverly advisor, or a professional advisor of your choosing, for guidance specific to your situation.