SECURE 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.

Two earlier blog posts, Things I Worry About (1) and Things I Worry About (2), discussed the general requirements and my concerns about which employees must be automatically enrolled. My last post, Things I Worry About (3), covered the straightforward and low cost corrections in SECURE 2.0 where the failures were due to reasonable administrative errors and were corrected on a timely basis.

This one looks at correcting automatic enrollment failures, such as not enrolling the eligible employees when required, that are not due to reasonable administrative errors or are not corrected on a timely basis.

Reasonable Administrative Error

Unfortunately, SECURE 2.0 does not define “reasonable administrative error” and, to compound matters, the existing IRS guidance—EPCRS, the Employee Plans Compliance Resolution System—does not use the term. (The current version of EPCRS is found in IRS Revenue Procedure 2021-30.) In a nutshell, it is not defined in any relevant context.

As a result, we are left to figure that out for ourselves, at least until the IRS issues guidance.

EPCRS does require that, for a plan sponsor to correct plan failures, it should have established practices and procedures, but a mistake was made notwithstanding those practices and procedures.

For example, in describing the self-correction program (“SCP”) under EPCRS,  at one point Rev. Proc. 2021-30 says:

“Established practices and procedures. To be eligible for SCP, the Plan Sponsor or administrator of a plan must have established practices and procedures (formal or informal) reasonably designed to promote and facilitate overall compliance in form and operation with applicable Code requirements. For example, the plan administrator of a Qualified Plan that may be top-heavy under § 416 may include in its plan operating manual a specific annual step to determine whether the plan is top-heavy and, if so, to ensure that the minimum contribution requirements of the top-heavy rules are satisfied. A plan document alone does not constitute evidence of established procedures. In order for a Plan Sponsor or administrator to use SCP, these established procedures must have been in place and routinely followed, and an Operational Failure or Plan Document Failure must have occurred through an oversight or mistake in applying them. SCP also may be used in situations in which the Operational Failure or Plan Document Failure occurred because the procedures that were in place, while reasonable, were not sufficient to prevent the occurrence of the failure.” (The emphasis is mine.)

My point is that the IRS may interpret “reasonable administrative error” to mean that a plan must have established practices and procedures, but inadvertently fail to properly apply them. That would be consistent with the current guidance.

That outcome could be problematic for the plans required to implement automatic enrollment under SECURE 2.0 since it is unlikely that they would have practices and procedures in place to cover the automatic enrollment requirements. If that is the case, and if the IRS applies this narrow interpretation of “reasonable administrative error”, the correction methods in SECURE 2.0 would not be available and the failure would need to be corrected under the “old” EPCRS (that is, Rev. Proc. 2021-30).

Timely Correction

Rev. Proc. 2021-30 has requirements for timeliness which are virtually identical to those in SECURE 2.0. Those time limits are discussed in my last post, Things I Worry About (3). Rather than repeating those here, this article assumes that neither of the timeliness requirements were satisfied.

In that case, EPCRS says that the corrections would be:

If the employee was not provided the opportunity to elect and make elective deferrals (other than designated Roth contributions) to a § 401(k) plan that does not satisfy § 401(k)(3) by applying the safe harbor contribution requirements of § 401(k)(12) or 401(k)(13), the employer must make a QNEC to the plan on behalf of the employee that replaces the “missed deferral opportunity.”  The missed deferral opportunity is equal to 50 percent of the employee’s “missed deferral.”  The missed deferral is determined by multiplying the actual deferral percentage for the year of exclusion (whether or not the plan is using current or prior year testing) for the employee’s group in the plan (either highly compensated or non-highly compensated) by the employee’s compensation for that year. The employee’s missed deferral amount is reduced further to the extent necessary to ensure that the missed deferral does not exceed applicable plan limits, including the annual deferral limit under § 402(g) for the calendar year in which the failure occurred.…The QNEC required for the employee for the missed deferral opportunity for the year of exclusion is adjusted for Earnings to the date the corrective QNEC is made on behalf of the affected employee.

Without going into all of the details, the employer must calculate the missed deferral percentage for the improperly excluded employee, and must contribute 50% of that amount (as a QNEC), plus missed earnings to the plan on behalf of that employee.

But what if the plan provides for matching contributions?

The EPCRS revenue procedure goes on to say:

If the employee should have been eligible for but did not receive an allocation of employer matching contributions under a non-safe harbor plan because he or she was not given the opportunity to make elective deferrals, the employer must make a corrective employer nonelective contribution on behalf of the affected employee. The corrective employer nonelective contribution is equal to the matching contribution the employee would have received had the employee made a deferral equal to the missed deferral determined [above]. The corrective employer nonelective contribution must be adjusted for Earnings to the date the corrective contribution is made on behalf of the affected employee.

In other words, the employer would need to make the plan’s regular matching contribution, but the match would be calculated based on the “missed deferral” as calculated under the provision above for correcting for the lost opportunity to make deferrals.

Note that, while this article discusses a common scenario, the correction methodology can vary depending on the circumstances. For example, the corrections for safe harbor plans are somewhat different.

The moral of the story is that it is really important to catch and correct  failures to automatically enroll eligible employees on a timely basis. Those early corrections for missed deferrals are easy and without cost to the employer. The early corrections for matching contributions are still less burdensome than later corrections. Of course, the best of all options is to correctly enroll the eligible employees.

Concluding Thoughts

It is likely that the 2025 automatic enrollment mandate for “new” 401(k) plans and private sector 403(b) plans will result in failures to cover some eligible employees. And, most likely, that will be due to inadvertent error, rather than intentional conduct. Providers and advisors to those plans can help reduce the cost and burden of correction by encouraging their affected plan sponsors clients to double check their census data and ensure that the right employees are covered by their plans.

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.