Section 101 of the Securing a Strong Retirement Act of 2020—also being called “SECURE 2.0”—is titled, “Expanding automatic enrollment in retirement plans.”
We all know how important the increasingly popular concept of auto enrollment has been for increasing 401k plan participation rates, so any effort to further boost its use is welcome news to retirement plan advisors. This being the case, let’s take a closer look at this particular provision of the newly introduced bipartisan retirement reform bill meant to build on last year’s SECURE Act. Call it a “Section 101 101,” if you will.
Section 101 explains in its text that many employees who are offered a 401k plan at work do not participate when they are not automatically enrolled upon becoming eligible. It goes on to note how being automatically enrolled has been shown to significantly increase participation, since many employees don’t take the initiative to “opt out.”
From the text of Section 101:
Since first defined and approved by Treasury in 1998, automatic enrollment has boosted participation by eligible employees generally, and particularly for Black, Latinx, and lower-wage employees. An early study found that adoption of auto-enrollment increased participation in a 401(k) plan by short-tenure Latinx employees from 19% to 75%. An Ariel Aon-Hewitt Study found that, in plans using auto-enrollment, “[t]he most dramatic increases in enrollment rates are among younger, lower-paid employees, and the racial gap in participation rates is nearly eliminated among employees subject to auto-enrollment.”
If the “Securing a Strong Retirement Act” were to become law, 401k, 403b and SIMPLE plans would be required to automatically enroll participants in the plans upon becoming eligible (and the employees may opt out of coverage).
The initial automatic enrollment amount is at least 3% but no more than 10%. And then each year that amount is increased by 1% until it reaches 10%.
Importantly, all current 401k, 403b and SIMPLE plans are grandfathered, and there is an exception for small businesses with 10 or fewer employees, new businesses (i.e., have been in business for less than 3 years), church plans, and governmental plans.
Expanded tax credit for new auto-enrollment plans
You may remember that the SECURE Act, signed into law by President Trump last December, created a new tax credit of up to $5,000 per year to employers to defray startup costs for new 401k plans and SIMPLE IRA plans that include automatic enrollment.
That credit was in addition to the plan start-up credit allowed under prior law and is available for three years. The credit is available to employers that convert an existing plan to one that features automatic enrollment.
The three-year small business start-up credit is currently 50% of administrative costs, up to an annual cap of $5,000. The new bill seeks to modify this tax credit. Under Section 102:
- The 50% would be increased to 100% for employers with up to 50 employees.
- Except in the case of defined benefit plans, an additional credit would be provided equal to the applicable percentage of the amount contributed by the employer on behalf of employees, up to a per-employee cap of $1,000.
This full additional credit would be limited to employers with 50 or fewer employees, and phased out for employers with between 51 and 100 employees. The applicable percentage would be 100% in the first and second years, 75% in the third year, 50% in the fourth year, 25% in the fifth year – and no credit for tax years thereafter.
Stay tuned to 401k Specialist as we will continue to roll out deeper dives into several key provisions among the 36 included among the 132 pages of the Securing a Strong Retirement Act of 2020, as well as tracking the bill’s progress through Congress.
The full text of the proposed legislation can be found here.
Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.
