Automatic enrollment (EACA and SECURE 2.0 mandate)

What automatic enrollment is

Under automatic enrollment, the plan document sets a default deferral rate. Eligible employees get advance notice and are enrolled at that rate unless they elect something else. There are three types:

• Basic automatic contribution arrangement (ACA): a default rate and a notice.

• Eligible automatic contribution arrangement (EACA): a uniform default for covered employees and an annual notice. The plan may let employees withdraw default deferrals within 90 days of the first deduction.

• Qualified automatic contribution arrangement (QACA): a safe harbor design with required employer contributions.

The SECURE 2.0 mandate

Section 414A of the tax code requires 401(k) plans established on or after December 29, 2022 to include an EACA for plan years beginning after December 31, 2024. The default must start between 3% and 10% of pay and rise by one percentage point a year until it reaches at least 10%, and no more than 15%. Exceptions cover businesses that normally have 10 or fewer employees, businesses less than three years old, plans established before the cutoff date, and church and governmental plans.

Why it matters to employers

Automatic enrollment raises participation, which helps a traditional plan pass the ADP test. An EACA that covers all eligible employees also has six months after the plan year, not two and a half, to refund excess contributions without the 10% excise tax. A small employer adding the feature may qualify for a $500 annual tax credit for three years.

Common mistakes

• Missing an employee, or starting deductions late. The fix can require an employer contribution.

• Forgetting the yearly increase.

• Sending notices late or not at all.

• Defaulting money into an investment that is not a QDIA.