- “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).
But there’s more to the requirement than first appears.
401(k) and 403(b) plans established before the enactment date (December 29, 2022) won’t have to be automatically enrolled and escalated. But plans “established” on or after the enactment date should either begin as “auto” plans or they will have to be converted to be automatic in 2025.
Advisors and consultants need to let employers who are considering setting up new plans know about the change, or 2025 could be a shock to those employers.
There are exceptions:
- Government and church plans.
- New businesses: The requirement will not apply to an employer that has been in existence for less than 3 years.
- Small businesses: The requirement will not apply until one year after the taxable year in which an employer has more than 10 employees.
- SIMPLE 401(k) plans.
- MEPs and PEPs: The auto requirement does not apply to a MEP or PEP as a whole; however, the requirement does apply to employers who adopt a MEP or PEP as if they were adopting a single employer plan on or after the enactment date.
With this change, it is only a matter of time until “automatic plans” are considered the norm. For the moment, however, this is a significant change, particularly for plans of small employers.
Any plan established on or after the enactment date—December 29, 2022—will ultimately need to be converted to an automatic plan under these new rules. Employers who are setting up plans should consider whether it is preferable to start as an automatic plan or to wait until 2025 to make the change. Advisors, consultants, recordkeepers and administrators will be at the forefront of educating employers about these changes and the considerations for making the necessary decisions.
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.
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The views expressed in this article are the views of Fred Reish, and do not necessarily reflect the views of Faegre Drinker.