The IRS issued proposed regulations addressing certain SECURE 2.0 Act provisions, including one generally requiring newly established 401(k) and 403(b) plans to enroll eligible employees automatically beginning with the 2025 plan year. In general, unless an employee opts out, a plan must automatically enroll the employee at an initial contribution rate of at least 3% (but not more than 10%) of pay and automatically increase the initial contribution rate until it reaches certain limits described below. This requirement generally applies to 401(k) and 403(b) plans established after December 29, 2022, the date the SECURE 2.0 Act became law, with exceptions for new and small businesses, church plans and governmental plans. The proposed regulations build on initial guidance provided by the IRS in Notice 2024-2.
Although the proposed regulations would only apply to plan years that begin more than six months after the date that final regulations are issued, the statute is effective for plan years beginning after December 31, 2024. Before the regulations are finalized, a plan must comply with a reasonable, good faith interpretation of statute.
Guidance on automatic enrollment requirements
In general, Internal Revenue Code (IRC) section 414A (added by SECURE 2.0), requires 401(k) and 403(b) plans to include an eligible automatic contribution arrangement (EACA) meeting certain automatic enrollment, automatic escalation and other requirements:
- All eligible employees covered. The proposed regulations would require the EACA to cover all employees in the plan who are eligible to make contributions (including long-term, part-time employees). Ordinary EACAs (i.e., those not required to comply with IRC section 414A) do not need to cover all employees eligible to make contributions.
- Existing employees with no affirmative election. Once the proposed regulations take effect, current employees who never elected to enroll (or never made an affirmative election not to enroll) in a 401(k) or 403(b) plan will need to be automatically enrolled.
The minimum “uniform percentage” of pay contributed by the participant during “the first year of participation” must be at least 3% and not more than 10%. This percentage must be increased automatically by one percentage point each plan year, up to a maximum of at least 10% (but not more than 15%). The default uniform percentage does not apply if the participant specifically elects to make contributions at a different percentage:
- Initial period. The proposed regulations would clarify that an employee’s “first year of participation” (what the regulations call the “initial period”) will last until the employee’s first full plan year has been completed. For each subsequent plan year, the percentage contribution under the default election must be increased by one percentage point until the maximum is reached.
- Uniformity requirement. The proposed regulations would also clarify that the following factors would not cause an EACA to fail to satisfy the uniform percentage requirement:
- Midyear automatic escalation. The percentage used for the default election varies based on the number of years (or portions of years) since the beginning of the initial period for an employee.
- Compliance with limits. The rate of contributions is limited so as not to exceed applicable IRC limits such as the annual 402(g) elective deferral limit (with or without catch-up contributions).
- Suspension for military service withdrawals. The default election is not applied during the six months when an employee is not permitted to have contributions made due to receiving a distribution while away performing military service.
Additional guidance
- Exception for new businesses. Businesses in existence for less than three years are not subject to the mandate. The proposal clarifies that after the three-year period ends, the plan does not need to adopt the automatic enrollment requirements until the next full plan year begins.
- Exception for small businesses. An employer will be considered exempt for a given year if it normally employed 10 or fewer employees. The proposal clarifies that this is satisfied if the employer had 10 or fewer employees on at least 50% of its typical business days during that year.
- Exceptions for plans established before the enactment of IRC section 414A. Cash or deferred arrangements (CODAs) and 403(b) plans that are established before December 29, 2022, are exempted. The proposed regulations provide the following guidance:
- Pre-enactment plans. A CODA is established on the date plan terms providing for the CODA are adopted, even if the effective date is later. A 403(b) plan is grandfathered if it was established before December 29, 2022, without regard to the date of adoption of plan terms that provide for salary reduction agreements.
- Merger of pre-enactment plans. If two pre-enactment plans — neither of which is a multiple employer plan (MEP) — merge, the plan after the merger will be treated as a pre-enactment plan. With respect to the merger of two pre-enactment MEPs, the same rule generally applies. (Note: MEPs also include pooled employer plans.)
- Merger of a pre-enactment plan with a post-enactment plan. In general, if a pre-enactment plan merges with a post-enactment plan, then the merged plan will be treated as a post-enactment plan.
- M&A exception. In the case of a merger of a post-enactment plan and a pre-enactment plan (neither of which is a MEP), the merged plan will be treated as a pre-enactment plan after the merger if the merger takes place in connection with a corporate transaction during a special transition period (which generally extends until the last day of the plan year following the year of the corporate transaction), and the pre-enactment plan is designated as the ongoing plan. The M&A exception would also apply where a single employer post-enactment plan merges into a MEP in connection with a corporate transaction if the MEP is designated as the ongoing plan and is treated as a pre-enactment plan with respect to the employer that engaged in the transaction.
- Adoption of, or merger with, a MEP. If an employer adopts a MEP after December 29, 2022, then the MEP will not be treated as a pre-enactment plan. The proposed regulations treat a merger of an existing single employer plan into a MEP differently from the adoption of a MEP. In general, if a single employer post-enactment plan is merged with a MEP, the MEP generally would be treated as a post-enactment plan with respect to that employer unless the M&A exception described above applies. However, if an employer merges a single employer pre-enactment plan into a MEP, then the post-merger MEP will be treated as a pre-enactment plan with respect to that employer, regardless of when the MEP was established.
- Spinoffs. If a portion of a pre-enactment plan is spun off, the spun-off plan will be treated as a pre-enactment plan if either the plan from which the spin-off occurred was not a MEP or the plan from which the spin-off occurred was a MEP that was treated as a pre-enactment plan with respect to the employer maintaining the spun-off plan.
Other guidance
The proposal also provides helpful guidance on a number of other automatic enrollment mandate issues, such as how the rules apply to multiemployer plans, how the rules apply when a plan also includes a pension-linked emergency savings account and how EACA notice requirements are affected by SECURE 2.0 changes.
