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.

Fortunately, the proposed regulation says that an old single employer plan would not be considered to be a new plan when it joins a post-enactment PEP (that is, a PEP that was established on or after December 29, 2022).

For background, my earlier blog posts, Things I Worry About (1), Things I Worry About (2), Things I Worry About (3) and Things I Worry About (4),  discuss the  general requirements and my concerns about which employees must be automatically enrolled.

The IRS has issued a new proposed regulation on the SECURE Act 2.0 automatic enrollment requirement (in section 414A of the Internal Revenue Code).

The proposed regulation discusses, among other things, the “merger” of single employer plans into “multiple” employer plans. For our purposes, a pooled employer plan (or PEP) is a type of multiple employer plan (or MEP) and the IRS guidance should be read to include PEPs in the references to MEPs. In addition, the term “merger” should be read to cover a single employer plan joining a PEP and transferring its existing assets into the PEP.

The preamble to the proposed regulation says, in the typical stilted language of the IRS:

In response to Notice 2024-2, the Treasury Department and the IRS received a number of comments expressing concern that, in the case of an employer maintaining a pre-enactment plan that is merged into a multiple employer plan that was established after December 29, 2022, the multiple employer plan would not be treated as a pre-enactment plan with respect to that employer after the merger. The comments requested guidance providing that if a pre-enactment plan is merged into a multiple employer plan, then the merged-in plan does not lose its pre-enactment status with respect to the employer that maintained the merged-in plan regardless of whether the multiple employer plan was established before or after December 29, 2022. In response to these comments, the proposed regulation would provide that, if an employer maintains a pre-enactment plan that is merged into a multiple employer plan after December 29, 2022, then the post-merger multiple employer plan will be treated as a pre-enactment plan with respect to that employer. This rule would apply regardless of the date of establishment of the multiple employer plan. (That’s my bolding to highlight the most relevant language.)

The key language is:  This rule would apply regardless of the date of establishment of the multiple employer plan. In other words, if an old single employer plan merges into a PEP, the part of the PEP representing the single employer plan will continue to be treated as a pre-enactment plan and will not need to start automatically enrolling its eligible employees…regardless of whether the PEP was set up pre- or post-enactment.

The proposed regulation has even more technical language to make that point (and I won’t take you down into the weeds on that). However, it also has an example that is helpful:

(iv) Example 4–(A) Facts. Plan E, a plan maintained by Employer U that is not a multiple employer plan, was adopted on January 1, 2021. Plan F, a multiple employer plan, was established on January 1, 2024. Plan E merges with Plan F on December 31, 2024.

(B) Analysis and conclusion. Under paragraph (e)(4)(ii) of this section, the portion of Plan F that applies with respect to Employer U will continue to be excepted from paragraph (b) of this section as a plan described in paragraph (e)(1)(i) of this section after the merger….                                                                                                                                                          (The bolding is mine.)

That’s clear as mud, right?

It becomes clearer when you know that (e)(1)(i) is the provision that defines pre-enactment, or old, plans. With that in mind, read the bolded language as “the portion of Plan F that applies with respect to Employer U will continue to be treated as a pre-enactment plan”.

In other words, when a pre-enactment single employer plan joins a post-enactment PEP, the portion of the PEP that belongs to the single employer will not need to start automatically enrolling its eligible employees.

Good Faith Reliance

The proposed regulation is just that…a proposal. In other words, it is not a final binding regulation. However, in the proposal the IRS said that, for plan years before the effective date of a final regulation, plan sponsors could rely on a good faith interpretation of Code section 414A. It is inconceivable that the provisions of the proposed regulation would not be considered a good faith interpretation. As a result, plan sponsors can now justifiably rely on the provisions of this proposal until there is a final regulation. In all likelihood, the final regulation will mirror the proposal in this regard.

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.