Category Archives: 403(b)

Things I Worry About (6): Automatic Enrollment (5) and PEPs


401(k), 403(b), SECURE 2.0
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Key Takeaways

  • The SECURE Act 2.0 required that “new” 401(k) and private sector 403(b) plans automatically enroll their eligible employees, but not until plan years beginning after December 31, 2024…just days ago.
  • “New” plans include most that were established on or after the enactment date of SECURE 2.0—December 29, 2022. “Old” plans—those adopted before the enactment date—are not required to automatically enroll.
  • However, it was not clear whether an “old” single employer plan that joined a “new” (post-enactment) PEP would be considered a new plan or an old plan. In fact, the IRS had issued some guidance that strongly suggested that it would be considered a new plan—which would mean that it would need to automatically enroll its eligible participants.
  • The IRS has just issued a proposed regulation on the SECURE 2.0 provision on automatic enrollment. The proposal provides that the “old” plan would continue to be considered an “old” plan even after joining a “new” PEP.

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…in other words the automatic enrollment requirement would apply beginning with the first payroll in January 2025.

The IRS previously issued Notice 2024-2 which suggests that, if a pre-enactment (“old”) 401(k) or private sector 403(b) plan joined (or, in IRS speak, merged into) a post-enactment (“new”) pooled employer plan, or PEP, the old plan would be treated as a new plan and would need to begin automatically enrolling its eligible employees. That presented a problem for plan sponsors of old plans who were considering joining a new PEP. Some simply didn’t want to automatically enroll their employees. Others who had rich matching formulas were worried about the cost. In any event, the Notice created a problem for many employers when considering joining a newly established PEP.

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Things I Worry About (5): Long-Term, Part-Time Employees (1)


401(k), 403(b), plan sponsors, SECURE Act
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Key Takeaways

  • SECURE Act 1.0 required that long-term, part-time (LTPT) employees be allowed to defer into 401(k) plans beginning January 1, 2024 for calendar year plans. However, plan sponsors are not required to contribute for them.
  • LTPT employees for SECURE 1.0 are those who have worked at least 500 hours a year for three consecutive years, but didn’t satisfy a plan’s regular eligibility provisions.
  • SECURE Act 2.0 reduced the three-year requirement to two years and extended the requirement to private sector 403(b) plans. The 2.0 change applies in January 2025 for calendar year plans. As a result, if the new two-year requirement is satisfied, those LTPT employees must be allowed to defer into the plans for the first payroll in January 2025.
  • My concern is that plan sponsors—and particularly small plan sponsors (e.g., private schools with 403(b) plans)—may inadvertently fail to satisfy these qualification rules and put their plans in jeopardy.

The SECURE Act (“SECURE 1.0”) included a provision that required sponsors of 401(k) plans to include their long-term, part-time, or LTPT, employees in their plans for purposes of deferring part of their compensation into the plan. Plan sponsors are not required to contribute for those LTPT participants (e.g., matching contributions) even if they do for “regular” participating employees,  but they may.

For purposes of SECURE 1.0, a part-time, or PT, employee is an employee who works at least 500 hours a year, but not enough to satisfy the plan’s regular eligibility provisions. A long-term employee is a PT employee who satisfies the requirement for three consecutive years. The first contingent of qualifying LTPT employees must have been allowed to defer in January of 2024. (For purposes of this article, I’m assuming that plans are on a calendar year.)

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Things I Worry About (4): Automatic Enrollment (4)


401(k), 403(b), SECURE 2.0
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Key Takeaways

  • The SECURE Act 2.0 required that “new” 401(k) and private sector 403(b) plans automatically enroll their eligible employees, but not until plan years beginning after December 31, 2024…just weeks from now.
  • “New” plans include most that were established on or after the enactment date of SECURE 2.0—December 29, 2022.
  • Unfortunately, it is likely that some of the affected plan sponsors will fail to automatically enroll their eligible employees on a timely basis.
  • My last post discussed the correction methods if the failures occurred due to a “reasonable administrative error” and were corrected on a timely basis.
  • This article discusses corrections for those failures if they did not result from a “reasonable administrative error” or if they were not corrected on a timely basis.

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.

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Things I Worry About (3): Automatic Enrollment (3)


401(k), 403(b), SECURE 2.0
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Key Takeaways

    • The SECURE Act 2.0 required that “new” 401(k) and private sector 403(b) plans automatically enroll their eligible employees, but not until plan years beginning after December 31, 2024…just weeks from now.
    • “New” plans include most that were established on or after the enactment date of SECURE 2.0—December 29, 2022.
    • Unfortunately, it is likely that some of the affected plan sponsors will fail to automatically enroll their eligible employees on a timely basis.
    • This article discusses corrections for those failures.

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.

My last two 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.

This one looks at the provisions in SECURE 2.0 about correcting automatic enrollment failures, such as not enrolling the eligible employees when required.

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Things I Worry About (2): Automatic Enrollment (2)


401(k), 403(b), SECURE 2.0, SECURE Act
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Key Takeaways

  • The SECURE Act 2.0 requires that “new” 401(k) and private sector 403(b) plans automatically enroll their eligible employees, but not until plan years beginning after December 31, 2024…just weeks from now.
  • Unfortunately, there are unanswered questions about how the automatic enrollment requirement will be applied. This article discusses two of those.

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.

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Things I Worry About: Automatic Enrollment (1)


401(k), 403(b), SECURE 2.0, SECURE Act
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This starts a new series of blog posts…Things I Worry About. I will number these, but they will be more episodic than sequential.

Key Takeaways

  • The SECURE Act 2.0 requires that “new” 401(k) and private sector 403(b) plans automatically enroll their eligible employees, but not until plan years beginning after December 31, 2024…just weeks from now.
  • There are some exceptions for small and new companies, but those exceptions expire as the number of employees grows or as time goes by.
  • I am worried that some of those plans may fail to begin automatically enrolling those employees next year, or as the companies grow, or as time goes by. The consequences of a failure can be significant.

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. 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 over two months from now.

SECURE 2.0 defines a “new” plan as one established on or after its enactment date—December 29, 2022.

In effect, the law has two effective dates. The first is that the 401(k) or private sector 403(b) plan must have been established on or after December 29, 2022 and the second is that those plans are not required to begin automatically enrolling until January 1, 2025. (A plan established after December 31, 2024 will need to automatically enroll their eligible employees immediately.)

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The SECURE Act 2.0: The Most Impactful Provisions #13 — Starter 401(k) Plans and Safe Harbor 403(b) Plans


401(k), 403(b), SECURE 2.0
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Key Takeaways

  • Most employees who work for large and mid-sized employers have the opportunity to defer money from their paychecks into a savings-based retirement plan. That is not the case with many small employers, though, where large numbers of employees work for firms that do not offer plans.
  • However, savings-based plans are critical for employees to obtain financial security in retirement. There are studies that show that employees who can defer into retirement plans will save much more for retirement that those who do not have access to plans.
  • Based on surveys, small employers do not offer plans because they are worried about the cost and administrative complexity of setting up and operating plans.
  • To allay that concern, Congress created, in SECURE 2.0, a new type of plan that is simple and low cost: “Starter” 401(k)s and “Safe Harbor” 403(b)s. The purpose of this new plan design is to encourage small employers to set up plans that enable their workers to save for retirement through deductions from their paychecks.

The President signed the Consolidated Appropriations Act, which included SECURE Act 2.0, on December 29, 2022.

SECURE Act 2.0 has over 90 provisions, some major and some minor; some mandatory and some optional; some retroactively effective and some that won’t be effective for years to come. One difference between SECURE Act 2.0 and previous retirement plan laws is that many of 2.0’s provisions are optional…that is, plan sponsors are not required to adopt the provisions, but can adopt them if they decide that the change will help their plans and participants. This series discusses the provisions that are likely to be the most impactful, either as options or as required changes.

This article is about an effort by Congress to extend plan coverage for workers at smaller employers by creating a new and straightforward type of low-cost plan:  the Starter 401(k) and Safe Harbor 403(b).

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The SECURE Act 2.0: The Most Impactful Provisions #12 — Multiple Employer 403(b) Plans


403(b), SECURE 2.0
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Key Takeaways

  • The SECURE Act 1.0 gave us Pooled Employer Plans, PEPs, for qualified plans.
  • SECURE Act 2.0—effective for plan years beginning after December 31, 2022—extends PEPs and MEPs to 403(b) plans.
  • While the legal effective date is already here, I haven’t yet seen any 403(b) MEPs or PEPs in the marketplace. So, the ”practical effective date” may be the 2024 plan year.

The President signed the Consolidated Appropriations Act, which included SECURE Act 2.0, on December 29, 2022.

SECURE Act 2.0 has over 90 provisions, some major and some minor; some mandatory and some optional; some retroactively effective and some that won’t be effective for years to come. One difference between the SECURE Act 2.0 and previous retirement plan laws is that many of 2.0’s provisions are optional…that is, plan sponsors are not required to adopt the provisions, but can adopt them if they decide that the change will help their plans and participants. This series discusses the provisions that are likely to be the most impactful, either as options or as required changes.

This article discusses the continuing extension of 401(k) concepts to 403(b) plans, specifically the SECURE Act 2.0 provisions for 403(b) PEPs and MEPs. This probably reflects the growing awareness of the higher costs in the 403(b) market, especially for smaller and midsized plans.

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The SECURE Act 2.0: The Most Impactful Provisions (#1–Automatic Plans)


401(k), 403(b), SECURE Act
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Key Takeaways

  • “New” 401(k) and 403(b) plans must be automatically enrolled, with automatic deferral increases, no later than the plan year beginning after December 31, 2024 (e.g., 2025 for calendar year plans).
  • Any plan “established” on or after December 29, 2022 is considered a new plan.
  • Defaulting participants must be invested in a QDIA.
  • There are exceptions for government plans, church plans, SIMPLE 401(k) plans, employers with 10 or fewer employees, and employers during their first 3 years of existence.

The President signed the Consolidated Appropriations Act, which included SECURE Act 2.0, on December 29, 2022—the “enactment date”.

SECURE Act 2.0 has over 90 provisions, some major and some minor. One of the most impactful provisions is the new requirement to automatically enroll and automatically increase deferrals to new 401(k) and 403(b) plans.

New 401(k)s and 403(b)s must be automatically enrolled and the deferrals automatically increased, beginning for plan years after December 31, 2024. At that time, 401(k) and 403(b) plans will be required to automatically enroll eligible employees at 3% (but not more than 10%) and thereafter automatically increase the deferral rates by 1% per year up to at least 10% (and if desired by the employer, up to a maximum of 15%). Defaulting participants must be invested in a QDIA (qualified default investment alternative).

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Best Practices for Plan Sponsors #12


401(k), 403(b), fiduciary, recordkeeper
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Lessons Learned from Litigation (#5)—The Johns Hopkins Case

This is the twelfth in a series of articles about Best Practices for Plan Sponsors. To be clear, “best practices” are not the same as legal requirements. Instead, they are about better ways to manage retirement plans. In many cases, though, “best practices” also are good risk management tools because they should exceed legal standards, address areas of concern, or anticipate future developments as retirement plans and expectations evolve.

Plan sponsors should be aware of the latest trends in fiduciary litigation to help manage the risk of being sued and, if sued, the risk of being liable. In my past four plan sponsor posts, Best Practices for Plan Sponsors #8, #9, #10 and #11, I discussed the lessons learned from the conditions in the settlement agreements for the Anthem, Vanderbilt, BB&T and ABB cases. This article—about the Johns Hopkins settlement agreement—is another example of the importance of using appropriate share classes and the monitoring of compensation of service providers . . . and more.

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