SECURE 2.0 – Automatic Benefit Plan Enrollment Is on the Horizon in 2025. How To Prepare and Common Employee Benefit Plan Audit Deficiencies Your Plan Can Avoid

When the Secure 2.0 Act was signed into law in December of 2022, it listed various provisions that would become effective over time for employee benefit plans. As we approach the end of 2024, one of the main provisions of Secure 2.0 is set to become effective January 1, 2025, and that is automatic enrollment for new employee benefit plans. Any new plan established on or after December 29, 2022, must implement an automatic enrollment feature in less than two short months. 401(k) plans established by new businesses (less than 3 years old) and those businesses with less than 10 employees are exempt from this mandate.

Whether you are setting up a new plan, thinking about implementing automatic enrollment in your current plan or already have started automatically enrolling employees, below are a few key items you should be aware of:

What is automatic enrollment for employee benefit plans?

Automatic enrollment is a feature that has been used increasingly over time to increase employee participation in benefit plans. If your plan is using a pre-approved Plan Document, the Adoption Agreement will include a section that allows the Plan to opt-in to an auto-enrollment feature. If a Plan is required to adopt auto-enrollment as part of Secure 2.0, make sure your Plan Document or Adoption Agreement is updated to reflect the following:

• Default contribution rate: This is the deferral percentage that must be withheld from your employees’ paycheck. Secure 2.0 requires this rate to be between 3 and 10%.
• Rate escalation: This is the rate employee deferrals must increase each year. If your Plan’s default contribution rate is 10% or greater, this does not apply. If the default rate is less than 10%, the rate must increase by at least 1% annually until a 10% rate is reached (15% is the maximum rate).
• Change date: This is the date the deferrals will increase each year.

Typically, a Plan will select a default investment option for automatic deferrals. Participants do have the option to change their investments and deferral percentages. Employees also have the option to opt out of automatic enrollment. For Plans adding this feature as a result of Secure 2.0, this information, along with the details of the automatic enrollment noted above, will need to be disclosed to the employees at least 30 days prior to the implementation (for most plans this is December 2, 2024 for calendar year plans).

What can an employee benefit plan do to prepare for automatic enrollment?

• Understand your plan’s eligibility requirements. Are there controls in place to ensure timely admission to the Plan?
• Talk to your payroll provider and TPA to establish appropriate timelines for plan entry. Establish a date that makes sense for auto-escalation.
• Establish a process for opting out and document, document, document. Best practice is to maintain a signed opt out form for each employee that elects not to participate in the Plan.

Automatic Enrollment is not a new concept. What deficiencies are typically found in this area during an employee benefit plan audit?

• Improper exclusion of employees from participating in the Plan.
• Late entry to the Plan.
• Lack of opt out forms or documentation of process for employees to opt out.
• Lack of controls over rate escalation. Is this being done consistently each year and are controls in place to stop the escalation once it reaches the maximum amount?

What if an error is found during my employee benefit plan audit?

An employee benefit plan audit consists of two parts: testing the Plan’s compliance with the Plan document and the preparation or review of the Plan’s financial statements to be attached to the Form 5500. When a plan has an automatic enrollment provision, this provision should be tested by your auditor. When one of the errors noted above is found, we will work with you in conjunction with your ERISA attorney, if necessary, to provide best practice recommendations on error correction. Freed Maxick has assisted in various qualified nonelective contribution (QNEC) corrections for our clients. The most common error is missed deferrals, which requires the Plan Sponsor to make a contribution on behalf of the participant which includes 50% of the missed deferral as well as the lost earnings.

How can Freed Maxick help with your employee benefit plan?

Freed Maxick’s Employee Benefit Plan team consists of over 50 professionals who have been trained in the numerous rules and regulations impacting this industry. Laws like SECURE 2.0, as well as changes implemented by the DOL, have made substantial changes to the regulations affecting employee benefit plans. Freed Maxick’s Employee Benefit Plan team can help EBP fiduciaries navigate through these changes and make sure your plan is compliant with the various rules and regulations. Our team performs over 150 employee benefits plan audits annually and prepares over 40 Form 5500’s. Freed Maxick is a member of the American Institute of Certified Public Accountants (AICPA) and its Employee Benefit Plan Audit Quality Center.