On January 10, 2025, the Treasury Department and the Internal Revenue Service issued Proposed Regulations on the automatic enrollment requirements introduced by SECURE 2.0. The Proposed Regulations incorporate and expand upon previously issued interim guidance under IRS Notice 2024-2 and address various open issues.
SECURE 2.0
SECURE 2.0 generally requires that new 401(k) and 403(b) plans that are established on or after December 29, 2022 (the “enactment date”), automatically enroll employees at a uniform contribution rate of 3% (but not more than 10%) and also automatically increase the contribution rate by 1% annually, up to at least 10% (with a cap at 15%).
Proposed Regulations
The Proposed Regulations include the following guidance on the application of the automatic enrollment requirements:
- Cash or Deferred Arrangement Requirements: The Proposed Regulations confirm that cash or deferred arrangements, including 403(b) plans with a cash or deferred arrangement (CODA), are required to comply with the automatic enrollment requirements at the contribution rates described above. In addition, participants have the following rights:
- Participants can opt out of automatic enrollment.
- Participants can choose a different contribution rate.
- Participants must be given reasonable time to make elections.
- Participants have 90 days from their first automatic contribution to withdraw any deferrals made.
- Participants must receive notice of their rights and obligations (although an annual reminder notice or combined notices may be provided if certain requirements are met).
- Participant Rights: The Proposed Regulations provide that all employees who are eligible to elect to make contributions under a CODA are covered under the automatic enrollment provisions, including certain long-term, part-time employees and current employees who did not have an affirmative salary contribution election in place on the date that the automatic enrollment rules first apply to the plan. However, employees who made an affirmative contribution election before that date are exempted from the automatic enrollment requirement.
- Rehires: Rehired employees who were previously subject to an automatic enrollment arrangement, but who have not been employed for an entire plan year, may be treated as new employees for purposes of determining their deferral percentage when rehired.
- Multiple Employer Plans: The Proposed Regulations clarify that the determination as to whether the automatic enrollment requirements apply in a multiple employer plan is made on an employer-by-employer basis. This means that the adoption of a multiple employer plan by an employer or a merger of an employer’s plan into a multiple employer plan on or after the enactment date, would not impact whether the plan is subject to the automatic enrollment requirements with respect to any other employer maintaining the plan.
- Plan Mergers: The Proposed Regulations confirm that if two plans that were established prior to the enactment date merge, they will not be considered a new plan and thus, will not be subject to the automatic enrollment requirements. Conversely, if a plan established prior to the enactment date merges with a plan established on or after the enactment date, the merged plan will lose its status as not being subject to the automatic enrollment requirements. An exception exists for a merger that occurs during the Internal Revenue Code Section 410(b)(6)(C) transition period, provided that the plan established prior to the enactment date is designated as the ongoing plan post-merger.
- Plan Spinoffs: The Proposed Regulations confirm that a plan that results from a spin-off, where the original plan was established prior to the enactment date, will not be subject to the automatic enrollment requirements.
- Exceptions: The Proposed Regulations confirm that the following are not subject to the automatic enrollment requirements:
- Businesses with 10 employees or less, as determined by the same method that is used under the COBRA continuation coverage requirements.
- Businesses in existence for less than three years.
- Church plans.
- Governmental plans.
- SIMPLE 401(k) plans.
If enacted, the Proposed Regulations will apply to plan years beginning six months after the final regulations are issued by the Internal Revenue Service. For earlier years, plans must follow a reasonable, good-faith interpretation of the new rules. Generally, plan amendments and plan design changes will not impact a plan’s automatic enrollment requirements. However, plans should review the automatic enrollment requirements if the plan amendment relates to a merger or the adoption of a multiple employer plan.
If you have questions about the automatic enrollment requirements, please contact a member of the Faegre Drinker benefits and executive compensation team.
The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.
