SECURE 2.0: Automatic Enrollment Mandate

Mandatory Automatic Enrollment Background

SECURE 2.0 mandates plans established after December 29, 2022 to implement a Mandatory Automatic Enrollment (MAE) provision if:

• The plan sponsor has been in business for at least three years and employs more than 10 people.
• Plan sponsors that hire their 11th permanent employee have until the year following the close of the year after the company or nonprofit employs more than ten people. For example, if the employer hires the 11th permanent employee in June of 2025, it has until January 1, 2027 to establish mandatory automatic enrollment.
• An employer is deemed to have 11 employees if there are at least 11 people on the payroll for half the year.
• To count the employees:
  • a full time employee (8 hours per day/40 hours per week or more) counts as one employee
  • part-time employees count as fractional employees
  • common law employees count, even if they are excluded from the plan
  • sole proprietors, partners in a partnership, directors of a corporation, independent contractors do not count
• Church plans, governmental plans, SIMPLE plans, businesses with 10 or fewer employees and businesses that are less than three years old are not subject to the mandate. Also, deferral plans signed prior to mandatory automatic enrollment effective December 29, 2022 are grandfathered and not subject to the rules. These grandfathered plans are called pre-enactment plans.

Other Requirements of Mandatory Automatic Enrollment

• Who Can and Who Must Be Auto Enrolled?: All eligible employees must be covered by automatic enrollment, but participants who had an affirmative election to defer, or not to defer, do not have to be automatically enrolled, although they can be. Also, participants with an affirmative election greater than the automatic enrollment default rate can be excluded from an automatic re-enrollment when the provision is implemented.
• Rehires: Previous employees who have left the entity for a full plan year or more can be treated like a new employee upon their return and automatically enrolled at the initial deferral rate, regardless of previous automatic increases the employee may have received. The plan can also re-enroll the re-hired employee at the deferral rate that was effective prior to the termination, subject to the break-in-service rules.
• Default Deferrals: MAE plans must apply a uniform rate to all eligible participants starting at a 3% default rate.
• Automatic Increases: The Mandatory Automatic Enrollment Regulations of SECURE 2.0 require automatic increases of 1% per year up to 10% with an option to continue the automatic increases up to 15%.
  • Initial Period: The initial period subject to the default automatic enrollment rate can end on the last day of the plan year following the later of the date the participant enters the plan or the date that mandatory automatic enrollment applies to the plan or the participant, or it can end at the end of the plan year when the participant was automatically enrolled.
• Affirmative Election: The participant must be able to make a deferral election different than the automatic enrollment default or make an election not to defer at all.
• Permissible Withdrawals: Up to 90 days after the payroll containing the first deferral, MAE plans must allow automatically enrolled participants to elect to stop their deferrals and have the automatic deferrals refunded. Any match contributions would be forfeited and used in accordance with the plan provisions. Refunded deferrals pay tax, but no penalties, in the year of distribution, and they are not included in the ADP/ACP tests or the 402(g) limits.
• QDIA: MAE plan default deferrals must be invested in a Qualified Default Investment Alternative (QDIA) that complies with the Department of Labor regulations, but participants can change the investment elections once the funds are in the account.
• Notice Requirements: The plan administrator must notify newly eligible individuals at least 30 days but no more than 90 days in advance of their automatic enrollment entry date, so that they have enough time to opt-out. If the participant can also withdraw within a specific amount of time after deferrals start, (usually up to 90 days), the notice must also include that information. Once automatically enrolled, participants must receive an annual notice informing them of all automatic enrollment provisions, including any scheduled automatic increases. The EACA and QACA rules give a safe harbor for notice distribution consisting of 30-90 days before the beginning of each plan year. In the case of newly eligible employees, no more than 90 days before eligibility and no later than the date of eligibility. The Notice can be combined with the QDIA Notice and other annual notices.
• Failures to Automatically Enroll: If a plan sponsor fails to automatically enroll a participant, but deferrals start by nine and a half months after the plan year-end, the plan sponsor does not have to contribute a QNEC for the failed deferral opportunity of the participant, but they must contribute 100% of the match applicable to the default enrollment rate, plus earnings.

Plan Mergers and Spin-Offs and Mandatory Automatic Enrollment

• If both merging plans were established before December 29, 2022, they are not subject to mandatory automatic enrollment.
• Plans that spin-off from a grandfathered plan are treated as pre-enactment plans, not subject to mandatory automatic enrollment.
• If a non-grandfathered plan and a grandfathered plan merge to form a new plan, the new plan is subject to mandatory enrollment.
• If a non-grandfathered plan merges into a grandfathered plan that becomes the surviving plan, then the surviving plan is still grandfathered

MEPs and PEPs

• The date when the MEP or the PEP was adopted is not relevant.
• One MEP or PEP can have grandfathered plans and plans subject to mandatory automatic enrollment, because the status sticks to the plan, not the MEP or the PEP.
• A merger of two MEPs or two PEPs does not impact the status of the member plans.
• Grandfathered plans that spin off from a MEP still retain their grandfathered status.
• The terms of the MEP or PEP could require automatic enrollment.
• Grandfathered plans that leave a MEP that required automatic enrollment can remove the requirement.

Although many plans subject to the automatic enrollment mandate are not likely to need an audit right away, because brand new plans tend to cover fewer than 100 employees, the automatic enrollment provisions that they must adopt follow very similar rules as those applicable to grandfathered large plans subject to an audit. To provide an efficient way to contrast and compare the available options, and the mandate, please refer to the chart below:

Behavioral Finance

Automatic enrollment has been proven to increase participation rates amongst employees who might have opted to delay or neglect saving for their retirement. Win. Statistically, employees are not likely to take the initiative to opt out, such that employers with automatic enrollment should budget to make the match assuming a high level of participation. Although the cost to the employer may feel burdensome initially, having employees who are retirement-ready may alleviate other costs later in the employment cycle, such as health-care costs. Win. The audit requirement is determined based on the number of account balances at the beginning of each year, so mandatory automatic enrollment may result in a greater number of audited plans. Wink. Recordkeepers, custodians, and investment advisors’ fees often do better as the plans do better. Win, win, win. For all these reasons, automatic enrollment is perceived as the right thing to do for all parties involved. Everybody wins.