SECURE 2.0 Auto-Enrollment: Which New 401(k) Plans Must Enroll Employees

Automatic enrollment turns the default answer on a workplace retirement plan from a no into a yes. In the IRS phrasing, the feature lets an employer automatically deduct elective deferrals from a worker's wages unless the worker actively opts out or chooses a different amount.^[1] An eligible employee is enrolled the moment they clear the plan's waiting period, and money begins flowing to the plan account on the next payroll cycle unless the worker takes action.

Congress made the feature mandatory for most new plans in the SECURE 2.0 Act of 2022. The Act added a new section 414A to the Internal Revenue Code, and the rule bites for plan years beginning after December 31, 2024.^[9] The policy target is the participation gap: workers who are eligible but who never fill out the paperwork. Setting up the plan with an payroll services partner who can wire deductions correctly on day one is what makes the mandate operational rather than a paper compliance exercise.

Any 401(k) or 403(b) plan established after December 29, 2022 falls under the rule.^[5] The date is not decorative: it is the day the SECURE 2.0 Act became law, and it draws the line between a pre-enactment qualified cash-or-deferred arrangement, which stays outside the mandate, and every plan adopted afterward, which sits inside it. A plan is treated as established on the date the plan document providing for the cash-or-deferred arrangement was initially adopted, even if the effective date is later.

The practical translation for a Miami small business owner setting up a first 401(k) today is direct: the plan document has to embed an eligible automatic contribution arrangement, or the plan is not a qualified 401(k) at all. The stakes matter, because losing qualified status disqualifies deductions and can push contributions into the participants' current-year gross income. That is why plan design for a brand-new plan is not a task for a stock template. It is an advisory solutions engagement paired with a specialized third-party administrator who drafts a compliant document.

Section 414A(b)(3) sets both a floor and a ceiling on the default deferral. The initial rate has to land somewhere between 3 percent and 10 percent.^[4] That range gives the plan sponsor room to pick a rate that fits the workforce (a higher rate produces more savings; a lower rate cuts the opt-out impulse) without letting either extreme swallow the policy.

After the first plan year of participation, the rate steps up by one percentage point each year, climbing to a cap the plan chooses between 10 percent and 15 percent.^[4] A plan that starts a worker at 3 percent, for example, walks the deduction to 4, 5, 6, and 7 percent over the following four plan years, and the escalator continues until the plan's chosen ceiling. Workers can override the default at any time, so the escalation is a nudge, not a lock.

Section 414A(c) carves out seven categories from the automatic enrollment rule. The exemptions were negotiated to give the smallest and youngest employers time to build a plan on their own terms, and to leave certain long-standing plan types alone. Missing an exemption line by line is common, so read them once and match your plan to each one before you assume you must comply.^[5]

The IRS classifies automatic enrollment into three flavors, and the SECURE 2.0 mandate requires the middle one. A basic automatic contribution arrangement (ACA) simply enrolls employees at the plan's default rate. An eligible automatic contribution arrangement (EACA) does the same but adds a specific participant safeguard: the plan may let employees pull the automatic contributions plus any earnings back out within 90 days of the first automatic contribution.^[2] That withdrawal window is a real gift to the employee who checks the paystub, realizes what happened, and wants to reverse course.

A qualified automatic contribution arrangement (QACA) layers safe-harbor status on top, exempting the plan from certain nondiscrimination tests. The QACA design walks the participant up: the default deferral starts at 3 percent and rises to 6 percent, with a hard ceiling at 10 percent.^[3] A QACA also requires either matching or nonelective employer contributions, and workers vest in those employer contributions after no more than 2 years of service.^[3] Section 414A requires the EACA structure at minimum; whether to layer QACA safe-harbor status on top is a design decision.

The tax credit story is the reason to look at compliance costs alongside the mandate. Congress paired the auto-enrollment rule with two federal credits designed to defray the setup burden.

The first is the small-employer pension plan startup costs credit under section 45E. Per the IRS, an eligible employer may claim up to $5,000 for each of the first three years to cover ordinary and necessary costs of standing up a SEP, SIMPLE IRA, or qualified plan such as a 401(k).^[7] The credit is claimed on Form 8881 and is limited to employers with 100 or fewer employees who received at least $5,000 in compensation.^[7]

The second is the auto-enrollment credit under section 45T. An eligible employer that adds an auto-enrollment feature to a plan can claim a tax credit of $500 per year for a three-year taxable period beginning with the first taxable year the auto-enrollment is in place.^[8] The two credits stack, and both feed the general business credit. A plan starter with fewer than 100 employees can therefore recover a meaningful share of the third-party administrator and payroll-integration costs of getting the plan running.

The mechanics of the notice are what separates a compliant plan from a technical fail. Under the EACA rules, the plan must apply its default deferral rate uniformly to every eligible employee after handing over the required notice.^[2] An eligible employee has to be told, in writing, what the default deferral rate is, that they have the right to opt out or elect a different amount, how the money will be invested if they make no choice, and how the 90-day withdrawal window works.^[2]

Most payroll platforms can emit the required notice, but only if the plan document, the payroll setup, and the enrollment queue are wired together correctly. A common failure mode we see with new plans is a notice that ships to the employee but never binds to the deferral start date the plan document requires. That mismatch shows up in a plan audit, not in the payroll register, so it does not surface until the plan year closes. A small business accounting engagement paired with the plan's third-party administrator is what keeps the notice, the deferral, and the plan document in agreement.

The Department of Labor's default-investment rules solve the problem for the plan sponsor. Money the EACA sweeps in with no participant investment election has to land in a qualified default investment alternative under 29 CFR 2550.404c-5.^[4] In practice, most plans direct the default money into a target-date fund keyed to the participant's projected retirement year, a balanced fund, or a managed account.

Getting the default investment correct is also how the plan sponsor limits its own fiduciary liability. The plan participant remains free to redirect the money at any time, but the sponsor can point to the QDIA safe harbor as evidence that the default was prudent. That protection matters most when markets fall and workers who never opted out start asking whose call it was to invest their paycheck deductions.

Automatic enrollment is one piece of a larger SECURE 2.0 build-out that reshapes how retirement deductions are set up, reported, and matched. Adding an auto-enroll feature therefore rarely arrives alone: it lands with Roth catch-up questions, employer-designated Roth match issues, and the reporting mechanics for pension-linked emergency savings accounts. For readers who already run a solo plan and want context on where Roth conversions fit alongside automatic contributions, our Solo 401(k) mega backdoor Roth guide guide covers the Roth side of the retirement architecture.

For a growing firm building a first plan around a professional workforce, our professional services tax help work sits at the intersection of the auto-enroll notice, the payroll deduction file, and the year-end reporting. Getting the trio to agree is the day-one job of the person implementing the plan, and it is the reason a plan starter should treat setup as a project with a real budget rather than a checkbox on a payroll platform.