SECURE Act 2.0 was enacted on December 29, 2022. Among its provisions is a requirement that “new” 401(k) plans and private sector 403(b) plans must automatically enroll their eligible employees, but not until the first plan year beginning after December 31, 2024 (the “applicable date”). Since most participant-funded and participant-directed plans, such as 401(k)s and 403(b)s, operate on a calendar year, this article discusses the effective date as if it were for the 2025 calendar year—just weeks from now.

My last blog post, Things I Worry About (1), discussed the general requirements and my concerns about those.

This one looks at two specific issues…automatic enrollment of “which” eligible employes and automatic enrollment of long-term, part-time employees.

On the first point, the question is whether a company with a “new” 401(k) or private sector 403(b) plan must automatically enroll only the “new” eligible employees or whether it must also enroll the “old” eligible employees. Let me explain.

If a company started doing business years ago and normally  has more than 10 employees, a question is whether it must, on January 1, 2025, automatically enroll all of the eligible employees, including those who became eligible before SECURE 2.0’s enactment date (December 29, 2022), or only those who became eligible after the enactment date, or only those who first become eligible on the applicability date—January 1, 2025.

Before going any further, the obvious “safe” answer is to automatically enroll all of the eligible employees on January 1, 2025…and start deducting deferrals from their paychecks on the first payroll after that, unless they opt out.

But is that required…for eligible employees other than those that are just becoming eligible? The answer is…we don’t know because the IRS hasn’t given us guidance. (There is a rumor, though, that we will get guidance before December 31, but it’s just a rumor. Part of the rumor is that we won’t like the guidance, which could mean that all of the eligible employees will need to be automatically enrolled.)

Under ordinary circumstances, an employer could add an automatic enrollment provision to an existing plan or set up a new plan with automatic enrollment and just enroll the newly eligible employees that way.

That reasoning would suggest that, at the least, the pre-enactment eligibles could be excluded. Right? Maybe not.

(So that you know, this article doesn’t discuss all of the plan design options that might be available for plan sponsors. Check with a benefits attorney or plan consultant about the options that might be available.)

But what about those that became eligible after enactment but before now? The dual effective dates…the enactment date for the plans subject to the rule and January 1, 2025 for the start date for automatic enrollment (the “applicability date”), make this messy. In theory, a plan should be able to exclude them as well. Will that work here? Maybe not.

Why the “maybe not’s”?

There is a line of thought that the automatic enrollment  mandate in SECURE 2.0 is a strong expression of public policy in favor of automatic enrollment and, therefore, any ambiguities should be resolved in favor of requiring that all eligible employees be automatically enrolled. I sense that the relevant folks at Treasury and the IRS are taking that approach. In that case, future guidance may say that all eligible employees must be automatically enrolled by “new” plans on January 1, 2025. That’s why I say the safe answer is to automatically enroll all of them.

So, what’s the bottom line? If an employer with a new plan doesn’t want to auto enroll all of the eligible employees, the employer should get legal advice. The consequence of being wrong can be significant…which I will discuss in my next post.

Another coverage issue is about LTPT employees—long-term, part-time employees. SECURE 1.0 required that, for calendar year plans beginning in 2024, LTPT employees be allowed to defer into 401(k) plans, although plan sponsors aren’t required to make employer contributions for them. Hopefully plan sponsors are doing that. For purposes of 1.0, a LTPT employee is one that worked at least 500 hours each year for three consecutive years (but didn’t work enough hours to otherwise become eligible under the terms of the plan…usually 1,000 hours for a year).

Then SECURE 2.0 came along and changed the definition of LTPT to at least 500 hours each year for two consecutive years, effective for 2025 plan years. Also, 2.0 extended the requirement to private sector 403(b) plans for the first time. Hopefully plan sponsors are aware of this requirement…after all it is a qualification issue.

Okay, so how does automatic enrollment affect LTPT employees. We don’t know. The IRS hasn’t issued any guidance. But if automatic enrollment applies, plan sponsors are just weeks from needing to be in compliance. As a result, the “safe” answer is to automatically enroll eligible LTPT employees for the first payroll in the plan year beginning in 2025. For calendar year plans, which most 401(k) and 403(b) plans are, that would be in January.

So, what’s my worry?

You guessed it. I am worried that many of the sponsors of new plans are not aware of the requirements and particularly aren’t aware of the “safe” solutions for covering employees and LTPT employees in their plans.

Concluding Thoughts

Time is of the essence. As providers to plans we should do what we can to help plan sponsors avoid getting in trouble. While this article isn’t legal advice, it does highlight the issues.

Let’s do what we can to keep employers who are trying to do the right thing—by sponsoring a retirement plan—keep out of trouble.

Postscript: Since part—perhaps most—of the confusion is due to a lack of guidance from the IRS, it would be reasonable for the IRS to provide relief from compliance failures. My next article will discuss the available corrections.

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.

The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Faegre Drinker.