Kareem called me from the HR department of a client company. “Hi David. What happens when a new employee doesn’t formally opt in or out of the retirement plan? I’m not sure what to do with them.”
“Great question, Kareem, and a timely one. Starting this year, if you open up a plan starting in 2023, you must have an automatic enrollment feature in place by no later than the beginning of 2025. This is a requirement for both the 401k and 403b plans.”
“So that means if they don’t opt out, they get automatically enrolled?”
“Exactly. Here’s how it works. It’s called an Eligible Automatic Contribution Arrangement or EACA—and that just means your new hires are automatically enrolled. Their contribution to the plan will be between 3% and 10%—wherever you want to start them—and you’ll increase their contribution 1% each year to at least 10% with a maximum of 15%.”
“Makes my job easier,” said Kareem,” but isn’t that a lot of stuff going on without the employee actually granting permission?”
“Yes,” I agreed, “and that’s why there’s a permissible withdrawal option in place for the first 90 days. If the employee doesn’t opt in or out, they’ll look at their pay stub, see that something is happening with their money, and either opt out or roll with it. You’ll get their attention one way or the other!”
“Any other provisions I should know about?” asked Kareem.
“Just a few. You have to have a QDIA set up—that’s a Qualified Default Investment Alternative. If you default into the plan, you are put in a proved default investment based on your age. For example, a 60-year-old new hire shouldn’t end up having their contributions put into something that has a long investment horizon.”
“Makes sense,” said Kareem.
“And the fine print says there are exceptions for small businesses of less than ten people, new businesses open less than 3 years, church and governmental plans, and plans effective prior to 2023.”
“That last one doesn’t apply to me,” said Kareem, “but you answered my question about new hires who can’t make up their mind. What I don’t understand is why would anyone try to figure out all this stuff on their own!”
“Kareem, my friend, that’s one question I don’t have the answer to!”
Struggling to keep up with the rules while you keep up with your work? Ask the retirement plan professionals at Concierge to help you stay on top of both!