Automatic Enrollment in 401(k) Plans: Rules, Notices, and Tax Credits

If you sponsor a 401(k) or 403(b) plan established after December 29, 2022, federal law now requires you to automatically enroll eligible employees, and the rules for employers on automatic enrollment in 401(k) plans reach well beyond flipping a switch in payroll. You have to set a default deferral rate between 3% and 10%, raise it one point each year until it hits at least 10%, deliver a specific notice inside a 30-to-90-day window, invest uninvested contributions in a qualified default fund, and give workers a way out. Missing any of those steps turns into an IRS correction problem.

Which Plans and Employers Must Automatically Enroll

Section 101 of the SECURE 2.0 Act added Section 414A to the tax code, making automatic enrollment mandatory for any 401(k) or 403(b) plan established after December 29, 2022. The requirement applies to plan years beginning after December 31, 2024.¹ Plans that existed before that cutoff are grandfathered.

Four categories of employers fall outside the mandate:

Employers who normally employ 10 or fewer workers. The obligation begins one year after the close of the first tax year in which you exceed that threshold.²
Employers that have existed for less than three years, counting any predecessor entity.
State and local government plans, and church plans.
SIMPLE 401(k) plans.¹

The exemptions are narrower than they look. A company with 15 employees launching a new 401(k) in 2026 gets no relief and must include automatic enrollment from the start.

The Default Contribution Rate and Automatic Escalation

For covered plans, the initial default deferral must be at least 3% of compensation and no more than 10%.² Most employers set the rate at the 3% floor.

After each completed year of participation, the default rate must increase by one percentage point. Escalation continues until the rate reaches at least 10%, with a permitted ceiling of 15%.² An employee who never adjusts their election will climb from 3% to 10% over seven years. Any worker who actively chooses a rate, including zero, overrides the default.

Choosing a Plan Design

Three legal frameworks are available, and the one you choose determines what testing relief and employee-refund features you get.

Basic Automatic Contribution Arrangement (ACA)

You set a default percentage and enroll everyone who doesn’t opt out. There are no special protections from annual nondiscrimination testing. If testing fails, you may have to return contributions to highly compensated employees, whom the IRS defines for the 2026 plan year as those earning more than $160,000.³

Eligible Automatic Contribution Arrangement (EACA)

An EACA adds a permissible withdrawal window that lets newly enrolled workers pull their money back out within 30 to 90 days of their first automatic contribution. Nondiscrimination testing still applies.

Qualified Automatic Contribution Arrangement (QACA)

A QACA satisfies nondiscrimination testing automatically. In exchange, you have to fund one of two minimum employer contribution formulas:

A 100% match on the first 1% of compensation deferred, plus a 50% match on deferrals between 1% and 6% of compensation, for a maximum match of 3.5% of pay.⁴
A flat 3% nonelective contribution for every eligible employee, whether or not the employee defers anything.

QACA matching contributions must fully vest within two years of service.⁵ That two-year cliff is faster than many traditional schedules, and it’s the trade-off Congress built in for the safe harbor.

The Notice You Have to Send

Before any money leaves a paycheck, the plan administrator must give every eligible employee a written notice. Timing is strict: at least 30 days but no more than 90 days before the start of the plan year or the employee’s eligibility date.⁶ For workers automatically enrolled on their first day of employment, the notice can be delivered on the hire date.⁷ The same window applies to the annual notice before each subsequent plan year.

The notice has to cover the default contribution percentage, how default contributions are invested, the employee’s right to change the rate or opt out, and the mechanics for making that election.

Electronic Delivery

You can deliver notices electronically, but a plan using electronic disclosure must first send an initial paper notice telling employees that future documents will arrive electronically, explaining how to opt out, and offering free paper copies on request.⁸ You cannot charge for paper delivery. Skipping that initial paper step is one of the more common compliance failures auditors flag.

Investing the Default Contributions

Money that comes in without an investment election has to go into a Qualified Default Investment Alternative (QDIA). The Department of Labor recognizes four categories:

Target-date funds, which shift toward more conservative holdings as the participant approaches retirement age. These are the most common QDIA.
Balanced funds, which hold a fixed stock-and-bond mix calibrated to the plan population.
Managed accounts, where a professional allocates assets across the plan’s investment menu based on the participant’s age and expected retirement date.
Capital preservation funds, which qualify as a QDIA only for the first 120 days after an employee’s initial automatic contribution.⁹

Picking an approved QDIA gives you fiduciary relief under ERISA. You’re generally not liable for investment losses in the default fund, provided it meets federal diversification and risk-management standards.

The annual QDIA notice must describe the default investment and disclose its fees and expenses, including sales charges, redemption fees, and total annual operating expenses as a percentage.¹⁰ Most plans satisfy this by attaching the fund prospectus.

Opt-Outs and Permissible Withdrawals

Every automatically enrolled employee can opt out at any time. What happens to money already contributed depends on your plan design.

An EACA or QACA can offer a permissible withdrawal window, running between 30 and 90 days from the date of the employee’s first automatic contribution, during which the worker can request a full refund of the deducted amounts.¹¹ The refund includes any gains or losses on the contributions, and any employer matching tied to the withdrawn amounts is forfeited.

The refunded pre-tax contributions count as taxable income in the year received, but the usual 10% early-withdrawal penalty does not apply.¹¹

Fixing a Missed Enrollment

When payroll or onboarding misses an eligible employee or applies the wrong default rate, the IRS treats it as an operational failure. The standard correction requires you to make a corrective contribution equal to 50% of the missed deferrals, adjusted for the earnings the money would have generated.¹² The employee must be fully vested in the corrective contribution immediately.

Reduced correction amounts are available for employers that catch and fix errors quickly, with the details in Revenue Procedure 2021-30. A missed enrollment that goes unnoticed for years is significantly more expensive to fix than one caught in the first pay period.

Tax Credits That Offset the Cost

Small employers adding automatic enrollment can claim a tax credit of $500 per year for three years under Section 45T of the Internal Revenue Code.¹³ The credit is available to employers with 100 or fewer employees who earned at least $5,000 in the prior year, and it applies whether you’re adding automatic enrollment to an existing plan or starting a new one.

That credit stacks with the retirement plan startup cost credit, which covers up to 100% of eligible administrative costs for employers with 50 or fewer qualifying employees and 50% for those with 51 to 100 employees.¹⁴ Combined, they can absorb a real share of the first three years of plan expenses for a smaller company.

1
Federal Register. Automatic Enrollment Requirements Under Section 414A
2
Office of the Law Revision Counsel. 26 USC 414A – Requirements Related to Automatic Enrollment
3
Internal Revenue Service. Notice 2025-67
4
Internal Revenue Service. FAQs – Auto Enrollment – Are There Different Types of Automatic Contribution Arrangements for Retirement Plans
5
Internal Revenue Service. Issue Snapshot – Vesting Schedules for Matching Contributions
6
U.S. Department of Labor. Automatic Enrollment 401(k) Plans for Small Businesses
7
Internal Revenue Service. FAQs – Auto Enrollment – When Must an Employer Provide Notice of the Retirement Plans Automatic Contribution Arrangement to an Employee
8
Federal Register. Requirement to Provide Paper Statements in Certain Cases – Amendments to Electronic Disclosure Safe Harbors
9
eCFR. 29 CFR 2550.404c-5 – Fiduciary Relief for Investments in Qualified Default Investment Alternatives
10
U.S. Department of Labor. Field Assistance Bulletin No. 2008-03 – Guidance Regarding Qualified Default Investment Alternatives
11
Internal Revenue Service. FAQs – Auto Enrollment – Can an Employee Withdraw Any Automatic Enrollment Contributions From the Retirement Plan
12
Internal Revenue Service. Fixing Common Plan Mistakes – Correcting a Failure to Effect Employee Deferral Elections
13
Office of the Law Revision Counsel. 26 USC 45T – Auto-Enrollment Option for Retirement Savings Options Provided by Small Employers
14
Internal Revenue Service. Retirement Plans Startup Costs Tax Credit