Attn: All Small Business Owners with a 401(k)
Did you know that Auto Enrollment is coming?
What is it? Any 401k or 403b established after December of 2022 must have auto enrollment in their plan beginning January 1, 2025. With the enactment of SECURE 2.0 this requirement goes into effect in just 6 months.
Auto Enrollment and the Default Contribution Rate: This rule requires that any plan established after December of 2022 contain an auto enrollment feature which automatically enrolls all eligible employees at a default contribution rate between 3% and 10% of salary unless the participant elects a different deferral percentages.
Further, there is an automatic escalation requirement that states plans must then automatically increase the deferral percentage by 1% each year until they reach a predetermined maximum. This maximum is elected by the employer and is between 10-15%.
What are the exemptions?
- Employers with a plan that was established prior to 12/29/2022*
- New companies that have been in operation less than 3 years*
- Businesses with less than 10 employees*
Assistance is on the way! Don't worry, we're here to support you. To begin, contact your TPA (Third Party Administrator) and keep us informed. We will collaborate with your TPA to update your plan.
Though it may feel daunting now, this adjustment can greatly benefit your employees' retirement savings. Typically, plans with auto-enrollment see a participation rate exceeding 90%, while those without it have a participation rate below 30%. Even though not all employees may initially appreciate the auto-enrollment feature, they will surely appreciate it later when monitoring their progress toward their retirement objectives.
*These exemptions all have if’s and’s or buts! This summary is a high level but not intended to be all encompassing
Distributions from traditional IRA’s and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 ½, may be subject to an additional 10% IRS tax penalty.