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.

Section 350 of SECURE 2.0 creates a new subsection in the Internal Revenue Code, 414(cc):

(cc) CORRECTING AUTOMATIC CONTRIBUTION ERRORS.—

(1) IN GENERAL.—Any plan or arrangement shall not fail to be treated as a plan described in sections 401(a), 403(b), 408, or 457(b), as applicable, solely by reason of a corrected error.

(2) CORRECTED ERROR DEFINED.—For purposes of this subsection, the term ‘corrected error’ means a reasonable administrative error—

(A) (i) made in implementing an automatic enrollment or automatic escalation feature with respect to an eligible employee (or an affirmative election made by an eligible employee covered by such feature), or

(ii) made by failing to afford an eligible employee the opportunity to make an affirmative election because such employee was improperly excluded from the plan, and…

Sorry for subjecting you to that legalese. I just wanted to share the pain of reading the stilted and technical statutory language—that is common in the Internal Revenue Code. But here’s a plain English explanation of the relief.

Congress was concerned about the possibility of the new mandates for automatic enrollment causing inadvertent qualification failures and wanted to provide relief in a way that involved little in the way of additional costs to plan sponsors. Also, I think they wanted to encourage automatic enrollment more generally and, as a result, created a somewhat painless way to correct mistakes. The correction methods are described later in this article.

Note, though, that I bolded “reasonable administrative error.” That means that the eased corrections are only available where the plan sponsor failure to automatically enroll eligible employees is due to a reasonable administrative error. Unfortunately, SECURE 2.0 didn’t define that term. An innocent mistake would qualify. An intentional failure to enroll someone wouldn’t. But what about a failure due to not knowing that the law required automatic enrollment (for example, for a 401(k) plan that was set up on or after December 29, 2022)? Ordinarily, ignorance of the law is not a reasonable basis for failing to comply with a law.

We will have to wait to see how the IRS applies that standard. Hopefully, for the first few years (e.g., 2025 and 2026), the IRS will be lenient…as long as the failure is corrected on a timely basis. More on that later in this article.

New Code section 414(cc) continues:

(B) that is corrected prospectively by implementing an automatic enrollment or automatic escalation feature with respect to an eligible employee (or an affirmative election made by an eligible employee) determined in accordance with the terms of an eligible automatic contribution arrangement (as defined under subsection (w)(3)), provided that—

(i) such implementation error is corrected not later than—

(I) the date of the first payment of compensation made by the employer to the employee on or after the last day of the 91⁄2 month-period after the end of the plan year during which such error with respect to the employee first occurred, or

(II) if earlier in the case of an employee who notifies the plan sponsor of such error, the date of the first payment of compensation made by the employer to the employee on or after the last day of the month following the month in which such notification was made,…

In other words, if the plan sponsor discovers the mistake (which was made due to a “reasonable administrative error”) and “corrects” it “no later than” the employee’s first payroll on or after 9½ months after the year of the mistake, the matter will have been corrected without further cost—at least for the missed deferrals. For automatic enrollment failures, that means that the employee would begin having deferrals withdrawn from the employee’s paycheck on or before the deadline, unless the employee opted out.

On the other hand, if the employee realized the mistake and notified the plan sponsor about the failure, the plan sponsor would have to correct (by automatically enrolling the employee) no later than the first payroll on or after the last day of the month after the month that the employee notified the plan sponsor.

But, what if the failure wasn’t due to a reasonable administrative error or wasn’t corrected on a timely basis. That is a subject for my next article. Needless to say, the correction will be more expensive.

To complicate matters, what if the plan sponsor made matching contributions, which of course weren’t made to the plan for the improperly excluded employee? Here is what 414(cc) says about that:

(ii) in the case of an employee who would have been entitled to additional matching contributions had any missed elective deferral been made, the plan sponsor makes a corrective allocation, not later than the deadline specified by the Secretary in regulations or other guidance prescribed under paragraph (3), of matching contributions on behalf of the employee in an amount equal to the additional  matching contributions to which the employee would have been so entitled (adjusted to account for earnings had the missed elective deferrals been made).

(iii) such implementation error is of a type which is so corrected for all similarly situated participants in a nondiscriminatory manner,

(iv) notice of such error is given to the employee not later than 45 days after the date on which correct deferrals begin, and

(v) the notice under clause (iv) satisfies such regulations or other guidance as the Secretary prescribes under paragraph (4).

Such correction may occur before or after the participant has terminated employment and may occur without regard to whether the error is identified by the Secretary.

Succinctly stated, the matching contributions have to be made as if the employee were automatically enrolled at the right time and as if the automatic deferral rate if the plan had been used to calculate the deferral amount. I bolded the language about the earnings adjustment for what the matches would have earned if they had been timely made. SECURE 2.0 says that the Secretary of Labor should provide guidance on how to calculate those missed earnings. From my perspective, and until we get that guidance, I think a good approach would be to use the earnings on the QDIA that the employee would have been defaulted into if the employee did not make an investment decision.

Concluding Thoughts

Obviously, the best outcome would be for plan sponsors to automatically enroll (and increase deferrals) when required by the terms of the plan. (I use “terms of the plan” loosely because plans won’t generally be required to be amended for SECURE 2.0 (and other recent laws) until 2026. But then they will have to amend their plans retroactively to include the SECURE 2.0 mandates, for example, the automatic enrollment provision will need to be effective on January 1, 2025.)

But there will be failures. One message in this article is that, if there are, they should be due to reasonable administrative errors and then should be corrected on a timely basis. In order to protect your plan sponsor clients, make sure that they know about the automatic enrollment requirement and about the correction methods. A mistake made by a plan sponsor who knows the rules is likely to be a reasonable administrative error.

But we know that won’t always be the case. My next article will talk about corrections for those who didn’t timely correct or whose mistakes weren’t reasonable administrative errors.

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.