Under 401(k) automatic enrollment rules, your employer deducts retirement contributions from your paycheck at a default rate unless you actively choose otherwise. Since the SECURE 2.0 Act took effect, most 401(k) plans established after December 29, 2022 are required to include this feature, with initial contribution rates starting between 3% and 10% of pay. Older plans can still adopt automatic enrollment voluntarily, and the arrangement they choose determines your default rate, how it escalates, what notice you get, and whether you have a special right to pull the money back out.
Which Plans Must Auto-Enroll
SECURE 2.0 added a mandatory automatic enrollment requirement for 401(k) and 403(b) plans established after December 29, 2022. It took effect for plan years beginning on or after January 1, 2025, so it is fully in force for 2026. Covered plans must automatically enroll eligible employees at a default rate between 3% and 10% of compensation and increase that rate by one percentage point each year until it reaches at least 10% but no more than 15%.
Several categories of employer are exempt from the mandate:
- Businesses with fewer than 10 employees
- Companies that have existed for less than three years
- Church and government plans
- SIMPLE 401(k) plans
Plans that already existed on December 29, 2022 are grandfathered and not required to add automatic enrollment, though many adopt it anyway.
The Three Types of Automatic Enrollment Arrangements
The IRS recognizes three types of automatic contribution arrangements, and the label on your plan controls the details of how enrollment works.1Internal Revenue Service. Retirement Topics – Automatic Enrollment
A basic Automatic Contribution Arrangement (ACA) is the simplest version. The plan document sets a default contribution percentage, employees who don’t make an election are enrolled at that rate, and the plan remains subject to annual nondiscrimination testing.2Internal Revenue Service. FAQs – Auto Enrollment – Are There Different Types of Automatic Contribution Arrangements for Retirement Plans?
An Eligible Automatic Contribution Arrangement (EACA) adds two features. The default contribution percentage must apply uniformly to all eligible employees, and participants get a special withdrawal right: if you were auto-enrolled and change your mind, you can pull out all the contributions (and any earnings or losses on them) within 90 days of the first automatic deduction. That withdrawal counts as taxable income but does not trigger the 10% early distribution penalty.3Office of the Law Revision Counsel. 26 USC 414 – Definitions and Special Rules
A Qualified Automatic Contribution Arrangement (QACA) is the most common voluntary structure. In exchange for mandatory employer contributions and a set escalation schedule, the plan is automatically treated as passing the ADP and ACP nondiscrimination tests.4Office of the Law Revision Counsel. 26 USC 401 – Qualified Pension, Profit-Sharing, and Stock Bonus Plans That testing relief is the reason most employers who adopt auto-enrollment pick this version.
Default Rate and Automatic Escalation
A QACA follows a specific deferral schedule. The default contribution rate must be at least 3% of compensation during an employee’s first year, then rise to at least 4% in the second year, 5% in the third year, and 6% every year after. During the first year the rate cannot exceed 10%; after that it can go as high as 15%.4Office of the Law Revision Counsel. 26 USC 401 – Qualified Pension, Profit-Sharing, and Stock Bonus Plans
Escalation happens automatically each plan year. An employee who never touches their election will see the rate climb from 3% to 6% over four years. Plans can escalate faster or cap higher, up to the 15% ceiling.
Plans subject to the SECURE 2.0 mandate face a steeper escalation floor: contributions must keep increasing until they reach at least 10%, rather than the 6% minimum that applies to voluntary QACAs.
Your Right to Opt Out or Change the Rate
Every automatically enrolled employee can decline participation or pick a different contribution rate before deductions begin. Your affirmative election always overrides the default, and you can change it later, including turning off future automatic increases.
Participants in an EACA get a second chance after contributions have already started. You can elect to withdraw all of your automatic contributions, along with any investment earnings or losses, within 90 days of the date of your first automatic deduction.3Office of the Law Revision Counsel. 26 USC 414 – Definitions and Special Rules The withdrawn amount is taxable income for the year you receive it, but the 10% early distribution penalty doesn’t apply.5Internal Revenue Service. Retirement Topics – Exceptions to Tax on Early Distributions Any employer matching contributions tied to those deferrals are forfeited when you take the withdrawal.
This 90-day window matters more than many employees realize. Once it closes, getting money out of a 401(k) before age 59½ generally means paying the 10% penalty on top of regular income taxes, unless another exception applies. If automatic enrollment catches you off guard and you can’t afford the contribution, act inside that 90 days.
Where Your Money Goes by Default
If you don’t choose investments, your contributions go into a Qualified Default Investment Alternative, or QDIA. The Department of Labor recognizes four types:
- A target-date fund that shifts its asset mix based on your expected retirement date
- A managed account that allocates among existing plan options based on your age or retirement date
- A balanced fund designed for the employee group as a whole
- A capital preservation product, but only as a default for the first 120 days of participation
You must be able to transfer out of the default investment at least quarterly without any financial penalty.6eCFR. 29 CFR 2550.404c-5 – Fiduciary Relief for Investments in Qualified Default Investment Alternatives
What the Employer Contributes and When You Own It
Every QACA requires the employer to put money in, not just the employee. The employer picks one of two formulas.4Office of the Law Revision Counsel. 26 USC 401 – Qualified Pension, Profit-Sharing, and Stock Bonus Plans
The matching option pays 100% of the first 1% of compensation you defer, plus 50% of the next 5%. If you contribute 6% of your pay, your employer puts in 3.5%. That is the maximum the formula requires, though employers can always contribute more.
The non-elective option pays at least 3% of compensation to every eligible employee, whether or not you defer anything yourself.
QACA employer contributions follow a two-year cliff vesting schedule. You own 0% until you complete two years of service, then you’re 100% vested.7Internal Revenue Service. Issue Snapshot – Vesting Schedules for Matching Contributions Leave before the two-year mark and you forfeit the employer money; stay past it and everything is yours.
The Notice You Should Receive
Employers running an EACA or QACA must send participants a written notice at least 30 days, but not more than 90 days, before each plan year begins.8Internal Revenue Service. FAQs – Auto Enrollment – When Must an Employer Provide Notice of the Retirement Plans Automatic Contribution Arrangement to an Employee For employees hired after the plan year starts, the notice can arrive on the date of hire if the plan enrolls them immediately.
An EACA notice must explain the default contribution rate, how to opt out or pick a different rate, how contributions will be invested if you make no election, and your right to withdraw automatic contributions within 90 days. A QACA notice covers the same ground and must also disclose the escalation schedule and the type and amount of employer contributions.9Internal Revenue Service. FAQs – Auto Enrollment – What Notice Do I Need to Provide to Employees for an EACA or QACA If you weren’t handed one of these before deductions started, ask your HR or benefits contact for it.
2026 Contribution Limits
Automatic enrollment sets your rate, but federal law caps how much you can defer in a calendar year. For 2026, the elective deferral limit for 401(k) plans is $24,500. Employees age 50 and older can make an additional catch-up contribution of up to $8,000, bringing the total to $32,500.10Internal Revenue Service. 401(k) Limit Increases to $24,500 for 2026, IRA Limit Increases to $7,500 Under a SECURE 2.0 provision that took effect in 2025, employees aged 60 through 63 qualify for a higher catch-up limit than the standard amount.
These limits matter because automatic escalation can push you close to the ceiling over time. If your plan escalates to 15% and you earn $170,000, that’s $25,500 in deferrals, which exceeds the $24,500 limit. Plan administrators are required to stop deferrals when you hit the cap, but checking your pay stubs during the year helps you avoid surprises when the excess is corrected.