One of the key features of the SECURE 2.0 Act of 2022 was its aim to enhance participation in retirement plans. On January 10, 2025, the Treasury Department and the IRS took a significant step forward by announcing proposed regulations that mandate automatic enrollment for new Code Section 401(k) and 403(b) retirement plans. This initiative stems from the SECURE Act 2.0, which introduced Code Section 414A, stipulating that a retirement plan must meet specific automatic enrollment criteria under Code Section 414(w) to be considered qualified.
The automatic enrollment requirements include:
- Mandatory automatic enrollment of employees with elective deferral contributions ranging from 3% to 10% in the first year, with annual increases of 1% between 10% and 15%.
- Allowing participants to withdraw their automatic elective deferrals within 90 days of their initial contributions.
- In the absence of an investment election, automatic elective deferrals will be directed into qualified default investment alternatives (QDIAs).
The original legislation specifies that these automatic enrollment requirements do not apply to:
- Plans established before December 29, 2022.
- Plans that have been in existence for less than three years.
- Governmental plans.
- SIMPLE 401(k) plans.
- Plans with fewer than 10 employees.
The Proposed Regulations offer further guidance on various aspects, including eligibility for automatic enrollment, contribution requirements, permissive withdrawals, and investment stipulations. They also integrate previous IRS guidance on automatic enrollment issued in Notice 2024-2, with some modifications.
Highlights From the Proposed Regulations
- Eligibility – Employers cannot exclude employee groups; all eligible employees must be subject to automatic enrollment. However, those with existing elections (either to contribute or opt out) on the compliance date can be excluded.
- Contribution Limits – Clarifies the determination of an employee’s “initial period” for contributions, which starts when the employee first becomes eligible and ends on the last day of the following plan year. This is crucial for the automatic escalation rule, which mandates an annual increase in the contribution percentage by one point (up to 10%).
- Plan Mergers and Spinoffs – Incorporates guidance from Notice 2024-2 regarding automatic enrollment for merged plans, including those involving multiple employer plans. Notably, merging two plans established before December 29, 2022, into one will not trigger the automatic enrollment requirements.
- New and Small Businesses – Automatic enrollment requirements will commence on the first day of the first plan year after the employer has been operational for three years. The 10-employee threshold is determined according to COBRA regulations.
- Multiple Employer Plans – If an employer adopts a multiple employer plan, the automatic enrollment requirements will apply as if it were a single employer plan, effective for plans adopted after December 29, 2022.
The Proposed Regulations will become effective six months after the final regulations are issued. However, the potential for changes in the presidential administration and related agency policies introduces uncertainty regarding the finalization of these regulations. Plan sponsors should act in good faith to comply with these rules until they are officially finalized.
For further information on this employee benefit plan update, please reach out to your contact at the firm or the authors.
