Frequently Asked Questions
Who is eligible for the Small Business Auto-Enrollment Exception?
Applies to employers in existence for less than 3 years or those who normally employ 10 or fewer employees.
How does the Small Business Auto-Enrollment Exception work?
New businesses (under 3 years) and small businesses (10 or fewer employees) are exempt from the mandatory automatic enrollment requirements for 401(k) and 403(b) plans.
What law authorizes the Small Business Auto-Enrollment Exception?
The Small Business Auto-Enrollment Exception is authorized under IRC §414A(c)(4) of the Internal Revenue Code (Title 26, United States Code).
Statutory Text — IRC §414A
Source: Internal Revenue Code, Title 26, United States Code
§ 414A. Requirements related to automatic enrollment(a) In generalExcept as otherwise provided in this section—(1) an arrangement shall not be treated as a qualified cash or deferred arrangement described in section 401(k) unless such arrangement meets the automatic enrollment requirements of subsection (b), and
(2) an annuity contract otherwise described in section 403(b) which is purchased under a salary reduction agreement shall not be treated as described in such section unless such agreement meets the automatic enrollment requirements of subsection (b).
(b) Automatic enrollment requirements(1) In generalAn arrangement or agreement meets the requirements of this subsection if such arrangement or agreement is an eligible automatic contribution arrangement (as defined in section 414(w)(3)) which meets the requirements of paragraphs (2) through (4).
(2) Allowance of permissible withdrawalsAn eligible automatic contribution arrangement meets the requirements of this paragraph if such arrangement allows employees to make permissible withdrawals (as defined in section 414(w)(2)).
(3) Minimum contribution percentage(A) In generalAn eligible automatic contribution arrangement meets the requirements of this paragraph if—(i) the uniform percentage of compensation contributed by the participant under such arrangement during the first year of participation is not less than 3 percent and not more than 10 percent (unless the participant specifically elects not to have such contributions made or to have such contributions made at a different percentage), and
(ii) effective for the first day of each plan year starting after each completed year of participation under such arrangement such uniform percentage is increased by 1 percentage point (to at least 10 percent, but not more than 15 percent) unless the participant specifically elects not to have such contributions made or to have such contributions made at a different percentage.
(B) Initial reduced ceiling for certain plansIn the case of any eligible automatic contribution arrangement (other than an arrangement that meets the requirements of paragraph (12) or (13) of section 401(k)), for plan years ending before January 1, 2025, subparagraph (A)(ii) shall be applied by substituting “10 percent” for “15 percent”.
(4) Investment requirementsAn eligible automatic contribution arrangement meets the requirements of this paragraph if amounts contributed pursuant to such arrangement, and for which no investment is elected by the participant, are invested in accordance with the requirements of section 2550.404c-5 of title 29, Code of Federal Regulations (or any successor regulations).
(c) ExceptionsFor purposes of this section—(1) Simple plansSubsection (a) shall not apply to any simple plan (within the meaning of section 401(k)(11)).
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