Effective for 2025 plan years, certain 401(k) and 403(b) plans established on or after Dec. 29, 2022, must meet new requirements around automatic plan enrollment of employees.

The IRS has now issued proposed regulations detailing these Internal Revenue Code Section 414A and 414(w)(3) requirements relating to default contribution percentages, withdrawals, notices of employees’ rights, and more. Read our overview. 

Background: Automatic enrollment to be required for certain tax-qualified retirement plans

The SECURE 2.0 Act of 2022 added new IRC Section 414A, which, effective for 2025 plan years, requires a cash or deferred arrangement under a 401(k) plan or a salary reduction agreement under a 403(b) plan, in either case that was established on or after Dec. 29, 2022, to meet the requirements for an “eligible automatic contribution arrangement” (EACA) under Section 414(w)(3). 

With exceptions related to certain plan transactions (e.g., certain plan mergers and plan spin-offs), this requirement does not apply to a 401(k) or 403(b) plan that:

• Was established prior to Dec. 29, 2022
• Is maintained by an employer that was in existence (including a predecessor employer) for less than 3 years 
  • The plan must include an EACA no later than the first plan year that begins on or after the third anniversary of the existence of the employer maintaining the plan (or a predecessor employer).
• Is maintained by an employer that normally employed 10 or fewer common law employees (i.e., excluding self-employed individuals, independent contractors, and directors) on a controlled group basis
  • “Normally employed” – If the employer had 10 or fewer employees, including both full-time and part-time employees, on at least 50% of its typical business days during that year
    • Each full-time employee is counted as one employee.
    • Each part-time employee is counted as a fractional employee. The employer can choose to determine the number on a daily basis or pay period basis, with the numerator being equal to the number of hours worked and the denominator being equal to the number of hours that would have to have been worked to be a full-time employee for a day or for the pay period.
• Is maintained by a governmental entity or a church
• Is a SIMPLE 401(k) Plan

Automatic enrollment requirements – Proposed regulations

The requirement under new Section 414A is that the cash or deferred arrangement under a covered 401(k) plan or the salary reduction agreement under a covered 403(b) plan must satisfy both the existing Section 414(w) EACA requirements as well as certain additional requirements imposed under new Section 414A. In general, the requirements are as follows:

• Employees will be automatically enrolled as participants in the plan unless they affirmatively elect not to participate.
• Unless/until the employee elects out of plan participation or elects a different percentage, a specified default percentage of their compensation will be contributed under the plan by the employer on a pre-tax basis (automatic enrollment contributions).
  • The default contribution percentage must be at least 3% but not more than 10%.
  • For a participant who does not elect a different contribution percentage, the percentage must increase by 1% for each subsequent year beginning after each completed year of participation under the EACA, up to a maximum default contribution percentage of at least 10% but not more than 15%.
• The plan may provide that a participant can elect to withdraw their automatic enrollment contributions from the plan – e.g., if the participant does not wish to participate in the plan or considers the automatic contribution percentage to be too high – within a limited time period:
  • The withdrawal election must be made within the time period provided for under the plan, which would be 30-90 days from the date on which the participant had any automatic enrollment contribution deducted from their pay.
  • If the withdrawal election is made, it would be effective as of the earlier of (i) the pay date for the second pay period, or (ii) 30 days after the first pay date.
  • The withdrawn amount will be treated as taxable income to the employee for the withdrawal year.
  • The withdrawn amount will not be subject to the 10% excise tax imposed under Section 72(t) on early withdrawals.
  • If an employer matching contribution was made with respect to the withdrawn amount, it will be forfeited by the employee
• If no investment election is affirmatively made by the participant (which is more likely to occur where a participant is automatically enrolled), the participant must be defaulted into an investment that meets the “Qualified Default Investment Alternative” requirements issued by the U.S. Department of Labor.
• Within a reasonable time before each plan year, employees must be provided with a notice explaining the employee’s rights and obligations under the plan, including:
  • The employee’s right to not have elective contributions made.
  • The employee’s right to elect a different contribution percentage than the default amount.
  • How their plan account will be invested if they do not affirmatively elect an available investment under the plan (i.e., the plan’s default investment).

What does CohnReznick think?

Research has consistently demonstrated that automatic plan enrollment can result in increased plan participation. Consequently, the automatic enrollment requirements are intended to provide for the retirement plan coverage of a greater number of employees. Although there are numerous exceptions as to which employers are subject to the new automatic enrollment requirements, employers that recently adopted or are considering the adoption of a new 401(k) or 403(b) plan should carefully determine whether the new requirements apply to their plans, and should work closely with their plan administrator to confirm compliance with the applicable requirements.