The SECURE 2.0 Act of 2022 requires certain 401(k) and 403(b) plans to include automatic enrollment and escalation features for the first plan year beginning after December 31, 2024, meaning that for those plans with a calendar plan year, the new year brought a new compliance obligation.
Beginning on January 1, 2025, 401(k) and 403(b) plans adopted after December 29, 2022 must automatically enroll plan participants to make pre-tax contributions between 3% and 10% of eligible pay during their first year of participation. Then, unless the participant affirmatively elects otherwise, the percentage of pay deferred must increase by one percentage point on the first day of each plan year, until the participant is contributing at least 10%, but no more than 15% of pay.
Certain plans adopted after December 29, 2022 are exempt from this requirement, including:
- plans sponsored by an employer, if the employer has existed for less than three years;
- plans sponsored by employers with less than eleven employees;
- governmental plans;
- church plans; and
- SIMPLE plans.
Employers should keep in mind guidance published by the IRS in December 2023 covering the application of these requirements to plan mergers. In this guidance, the IRS noted that in certain circumstances, the merger of a plan exempt from the requirements with a plan that is subject to the requirements will result in the merged plan being subject to the requirements, but in other circumstances the surviving plan will be exempt from the requirements. Employers considering a plan merger should consult with employee benefits counsel.
Employers who fail to properly implement the new requirements may be able to correct these errors under the IRS’s Employee Plans Compliance Resolution System (“EPCRS”). Under EPCRS, employers that timely correct automatic enrollment and escalation errors and comply with the applicable notice requirements are able to take advantage of reduced corrective contribution requirements.
