IRS Proposes Regulations on Mandatory Automatic Enrollment
The IRS issued Proposed Treasury Regulation 1.414A-1 on January 14, 2025, in support of SECURE Act 2.0’s mandate to include eligible automatic contribution arrangements (EACAs) in newly established 401(k) and 403(b) plans, effective for plan years after December 31, 2024. The proposed regulations also address other provisions of the SECURE Act 2.0 as they relate to the auto enroll mandate, including
Eliminating unnecessary plan notices to unenrolled participants,
Optional pension-linked emergency savings accounts (PLESAs) for non-highly compensated employees (non-HCEs), and
Consolidated defined contribution (DC) notices.
There is a 60-day public comment period until March 17, 2025, on the proposed rules, followed by a public hearing scheduled for April 8, 2025. The rules will not apply until six months after official publication of the final rules. For earlier plan years, a plan would be treated as having complied with IRC. §414A if the plan complies with a reasonable, good faith interpretation of the statutory provision.
Automatic Enrollment Mandate
The proposed regulations mandate all new plans must automatically enroll eligible employees at a minimum contribution rate of 3%, increasing by 1% annually until reaching at least 10% but not exceeding 15%. Employees must be able to opt out or modify their contribution percentage. Additionally, plans must allow withdrawals without penalties within 90 days of automatic enrollment. The IRS takes the position in the proposed regulations that the automatic enrollment requirements apply to all eligible employees, including long-term, part-time employees, without exception.
Investment allocations for contributions under EACAs must comply with the Department of Labor’s (DOL’s) qualified default investment alternative (QDIA) rules. The regulations also define exceptions for specific plans, including those established before December 29, 2022, government and church plans, and small or new businesses with fewer than 10 employees or in operation for less than three years.
The proposed regulations provide detailed rules regarding the impact of mergers, acquisitions, and spin-offs on automatic enrollment compliance.
Key Takeaways
Pre-enactment Status: Plans established before December 29, 2022, can retain their status under certain conditions during mergers and acquisitions.
Transaction-Based Exceptions: Specific transactions and timely mergers can allow plans to retain their pre-enactment status.
Employer-Specific Rules: For MEPs, the rules apply individually to each participating employer.
General Rule for Mergers
If a 401(k) or 403(b) plan established before December 29, 2022 (i.e., a pre-enactment plan), merges with a plan established on or after that date, the merged plan generally will not retain the pre-enactment status unless specific conditions are met.
Exception for Certain Transactions: If the merger occurs in connection with a transaction described in Treas. Reg. § 1.410(b)–2(f) (such as an acquisition or disposition), and the pre-enactment plan is designated as the ongoing plan, the merged plan can retain its pre-enactment status if the merger occurs within the transition period specified in IRC § 410(b)(6)(C)(ii).
Example—Merger of Single Employer Plans: Plan A (pre-enactment plan) merges with Plan B (post-enactment plan). If Plan A is the surviving plan and the merger is not part of an acquisition or disposition under Treas. Reg. § 1.410(b)–2(f), Plan A will lose its pre-enactment status. Exception: If the merger is part of a qualifying transaction and occurs within the transition period, Plan A retains its pre-enactment status.
Multiple Employer Plans (MEPs)
For MEPs, the rules apply on an employer-by-employer basis. If an employer adopts a multiple employer plan after December 29, 2022, the plan will not be treated as a pre-enactment plan with respect to that employer. However, this does not affect other employers in the plan who adopted it before that date.
Example—Merger Involving MEPs: Plan C (pre-enactment MEP) merges with Plan D (post-enactment single employer plan). If Plan D merges into Plan C, Plan C retains its pre-enactment status for other employers but not for the employer of Plan D unless the merger is part of a qualifying transaction.
Note: Previously in Notice 2024-2, the IRS appeared to take the position that, if a single employer plan that was grandfathered from the automatic enrollment requirements merged into a post-enactment MEP or pooled employer plan (PEP), then the single-employer plan would lose its grandfathered status within the MEP or PEP. The IRS modifies that prior position in the proposed regulations such that the single-employer plan in the above situation would not lose its grandfathered status.
Plan Spin-Offs
If a portion of a pre-enactment plan is spun off to form a new plan, the new plan will retain the pre-enactment status if the original plan was not a MEP or if it was a MEP treated as a pre-enactment plan with respect to the employer maintaining the spun-off plan.
Example—Plan Spin-Off: Plan E (pre-enactment) is spun off to form Plan F. If Plan E were an MEP, Plan F would retain pre-enactment status if Plan E were treated as a pre-enactment plan for the employer maintaining Plan F.
The regulations further clarify that amendments to existing plans, including changes in service providers or eligibility expansions, do not alter their pre-enactment status unless they involve the adoption of an MEP or a merger with a non-pre-enactment plan. This ensures consistency and protects employers who make administrative updates without intending to change their compliance obligations.
Eliminating Unnecessary Plan Notices
The proposed regulations for the auto enroll mandate also include specific provisions for unenrolled participants in retirement plans. An unenrolled participant is defined as an employee who is eligible to participate in a DC plan, has received the necessary initial eligibility notices, but is not currently participating in the plan.For unenrolled participants, the regulations stipulate that no additional disclosures, notices, or plan documents are required to be furnished, provided that these participants receive an annual reminder notice.
This annual reminder notice must:
Inform them of their eligibility to participate in the plan and any applicable election deadlines and
Be clear, comprehensive, and written in a manner that is easily understood by the average employee.
Additionally, the plan sponsor must provide any document requested by the unenrolled participant in a timely manner that they are entitled to receive.
PLESAs
The proposed regulations for the auto-enroll mandate also address the integration of PLESAs with retirement plans. PLESAs are a feature introduced by the SECURE 2.0 Act, effective for plan years beginning after December 31, 2023, allowing participants to save for emergencies within their retirement plans.
If a retirement plan includes a PLESA, the PLESA is considered part of the plan's cash or deferred arrangement (CODA). An affirmative election to contribute to a PLESA is treated as an affirmative election to contribute to the CODA. This means that if the plan is subject to the automatic enrollment requirements of IRC §414A, an affirmative election to contribute to a PLESA would count as an affirmative election under the CODA. However, automatic contributions to a PLESA generally do not meet the QDIA investment requirements of IRC Sec. 414A(b)(4). Therefore, automatic contributions to a PLESA cannot be used to satisfy the automatic enrollment requirements under IRC § 414A. This distinction ensures that while PLESAs provide a valuable savings option for emergencies, they do not interfere with the primary goal of retirement savings under the automatic enrollment rules.
Consolidated Notices
The proposed regulations for the auto-enroll mandate allow for the consolidation of various required plan notices. This consolidation aims to streamline communication and reduce redundancy, making it easier for plan sponsors to comply with notice requirements while ensuring that participants receive all necessary information.
Permitted Consolidation: The EACA notice required under Treas. Reg. §1.414(w)–1(b)(3) can be combined with other required notices such as for:
QDIAs
Automatic contribution arrangements
PLESAs
Safe harbor status
A qualified automatic contribution arrangement (QACA)
Requirements for Combined Notices:
The combined notice must include all required content for each individual notice.
The issues addressed in the combined notice must be clearly identified.
The combined notice must be furnished at the time and with the frequency required for each individual notice.
The notice must be presented in a manner that is reasonably calculated to be understood by the average plan participant.
The primary information required for each notice must not be obscured or fail to be highlighted.
By consolidating notices, plan sponsors can improve the efficiency of their communication processes while ensuring that participants are well-informed about their rights and obligations under the plan. For additional guidance with these proposed changes, connect with our Trusted Advisors at https://www.kerberrose401k.com/schedule-a-meeting.
Sources:
https://www.govinfo.gov/content/pkg/FR-2025-01-14/pdf/2025-00501.pdf
Code of Federal Regulations (n.d.). 1.410(b)-2 Minimum coverage requirements (after 1993). https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR686e4ad80b3ad70/section-1.410(b)-2
(n.d.). Sec. 410. Minimum Participation Standards. Bloomberg Tax. https://irc.bloombergtax.com/public/uscode/doc/irc/section_410