Automatic enrollment for small business 401(k) plans
Automatic enrollment signs employees up for the plan unless they opt out. It is one of the most effective ways to raise participation, and for most new 401(k) plans it is now required. Here is how it works and what small employers need to know. Setting up a plan? Request a plan review.
Is it required for your plan?
Under SECURE 2.0, most new 401(k) plans established after December 29, 2022 must automatically enroll eligible employees, starting with plan years beginning in 2025. Exceptions include:
- Businesses with 10 or fewer employees
- Businesses in existence for less than three years
- 401(k) plans established before December 29, 2022
- SIMPLE 401(k) plans, church plans and governmental plans
SIMPLE IRAs and SEP IRAs are not subject to the mandate. Employers who aren't required to auto-enroll can still choose to.
How the required design works
- Starting rate: employees are enrolled at a default deferral of at least 3% and no more than 10% of pay.
- Automatic increases: the rate rises by 1 percentage point each year until it reaches at least 10%, up to a maximum of 15%.
- Opting out: employees can change their rate or opt out at any time, and can withdraw automatic contributions within the first 90 days.
- Default investment: money goes into a qualified default investment, often a target date fund, unless the employee chooses otherwise.
- Notices: employees receive a notice before they are first enrolled and before each plan year, generally 30 to 90 days in advance.
Why owners like it even when it is optional
- Participation: more employees save, which makes the benefit more valuable for recruiting and retention (see making the benefit visible).
- Testing: higher participation among rank-and-file employees helps a traditional 401(k) pass nondiscrimination testing, and a qualified automatic contribution arrangement can serve as a safe harbor.
- Tax credit: eligible small employers can claim $500 a year for three years for adding an eligible automatic enrollment feature to a 401(k) or SIMPLE IRA. Try the tax credit calculator.
What to budget for
If the plan includes a match, more participation means more matching dollars. Model the cost at realistic participation rates before choosing the match formula, and make sure payroll can handle the automatic increases.
Common questions
Do small businesses have to auto-enroll employees in a 401(k)?
Most new 401(k) plans established after December 29, 2022 must, starting with 2025 plan years. Businesses with 10 or fewer employees, businesses less than three years old and plans established before December 29, 2022 are exempt.
What default rate does automatic enrollment use?
Under the SECURE 2.0 mandate, employees start at a default deferral between 3% and 10% of pay, rising 1 percentage point a year to at least 10%, with a maximum of 15%. Employees can change it or opt out.
Is there a tax credit for automatic enrollment?
Yes. Eligible small employers can claim $500 a year for three years for adding an eligible automatic enrollment feature to a 401(k) or SIMPLE IRA.
Want help designing automatic enrollment?
We’ll model participation and match costs for your team and recommend a design. The initial plan review is complimentary, and we aim to reply within one business day.
Request a plan reviewGeneral educational information as of September 27, 2026; limits and rules change. Not individualized investment, tax or legal advice. Consult your tax adviser about your situation.