On Friday, January 10, 2025, the Department of the Treasury and the Internal Revenue Service (IRS) issued proposed rules for several provisions of the SECURE 2.0 Act of 2022 (SECURE 2.0). Part One of the blog series covered catch-up contributions. This blog discusses the proposed rule that adds to the SECURE 2.0 requirement that new defined contribution retirement plans must include an automatic enrollment feature.

Under SECURE 2.0 and the proposed rule, plan sponsors of newly established 401(k) and 403(b) plans must automatically enroll eligible employees in the plan.

Newly established plans must:

• Give employees the chance to opt out of automatic enrollment
• Automatically enroll employees, if employees do not opt out, at an initial contribution rate of at least 3%, but not more than 10%, of the employee’s pay
• Automatically increase the initial contribution rate by 1% each year until it reaches at least 10% of the employee’s pay, up to 15%.

What does newly established mean? The automatic enrollment requirement applies to 401(k) and 403(b) plans established after December 29, 2022, when SECURE 2.0 became law. Plans established before this date are considered pre-enactment plans since they were established before SECURE 2.0 became enacted. While the proposed rule is not effective until the first plan year beginning six months after a final rule is issued, the new automatic enrollment requirements are effective for plan years beginning on and after January 1, 2025. In the interim, plans will be treated as being compliant as long as they follow a good-faith, reasonable interpretation of the law.

Participant Eligibility

All employees eligible to make salary deferrals must be included in automatic enrollment, including:

• Long-term, part-time employees
• Employees hired before the automatic enrollment requirements’ effective date who have not made affirmative deferral elections
• Rehired employees. If the rehired employee is not eligible for default contributions for an entire plan year, they may be treated as a new employee. Groom Law Group provides this example: “If employee P is automatically enrolled in 2025 with a 3 percent deferral rate, which is automatically increased to 4 percent in 2026, and P terminates employment in late 2026 before being rehired in early 2028, P may be automatically enrolled at 3 percent upon rehire.”

All eligible participants must also have the option to withdraw their automatic contributions within 90 days of their initial contribution. However, if a participant already has an affirmative deferral election on the date the plan becomes subject to the automatic enrollment requirements, that election can remain in place. In that instance, the participant is not required to be automatically enrolled.

Exemptions

SECURE 2.0 provides several exemptions from the automatic enrollment rule, including:

• Small businesses with fewer than ten employees. The proposed rule does not provide guidance on how to count employees for purposes of the rule.
• Employers in existence for less than three years (new businesses)
• Church plans
• Governmental plans.

Participant Notices

Plans subject to automatic enrollment requirements must provide Eligible Automatic Enrollment Agreement (EACA) notices. Section 320 of SECURE 2.0 allows plans to send reminder notices for unenrolled participants instead of full annual notices. The proposed rule confirms that required EACA notices can be combined with other required participant notices, including default investment notices, notices for pension-linked emergency savings accounts (PLESAs) and safe harbor notices.

Additional Considerations for Pre-Enactment Plans

Multiple Employer Plans (MEPs) and Pooled Employer Plans (PEPs)

For MEPS and PEPs, the requirements in the proposed rule apply on an employer-by-employer basis. A plan established before December 29, 2022 from a small employer or from a new employer who joins a MEP or PEP is not automatically subject to automatic enrollment requirements.

Multiemployer Plans

If a multiemployer plan had a 401(k) plan before December 29, 2022, it keeps its pre-enactment status and does not have to apply the automatic enrollment rules to any employees. However, if the plan was adopted before December 29, 2022 but did not add a 401(k) plan until after that date, the plan must provide automatic enrollment to employees.

Plan Mergers and Spin-Offs

If two plans merge that were established before December 29, 2022, they are exempt from automatic enrollment requirements. In merger situations where one plan is subject to automatic enrollment requirements, the merged plan is generally subject to automatic enrollment. Spin-off plans derived from single employer plans prior to SECURE 2.0’s enactment are treated as pre-enactment plans, not subject to automatic enrollment requirements.

Plan Amendments

The proposed rule confirms that most plan amendments do not trigger automatic enrollment requirements, as most amendments would not affect a plan’s status as a pre-enactment plan. Plan amendments related to MEPs/PEPs, multiemployer plans, and mergers and spin-offs must be reviewed to determine whether automatic enrollment requirements apply.

Comments on the proposed rule are due March 17, 2025.

Next Steps

Employers should take the following steps to prepare for changes resulting from the proposed requirement that newly established defined contribution retirement plans must include an automatic enrollment feature.

• Determine participant eligibility. Figure out which employees to include in automatic enrollment.
• See if an exemption applies. Assess whether the employer is a small or new business, or a church or governmental plan to determine if and when automatic enrollment requirements may take effect.
• Seek guidance. Consult with benefits and legal professionals to clarify how the application of automatic enrollment rules applies to a MEP/PEP, merger or spin-off situation, or amendments to plans in existence before December 29, 2022.
• Communicate with employees. Determine how to communicate notice requirements to participants to ensure compliance once final rules are in place.

Remember that the proposed rule is not yet final and may change before final guidance is issued. In the meantime, IRS will use a good-faith approach to enforcement. Stay tuned to the International Foundation for additional updates on SECURE 2.0 provisions and visit our SECURE 2.0 Toolkit.

Developed by International Foundation Information Center staff. This does not constitute legal advice. Please consult your plan professionals for legal advice.