SECURE 2.0: Mandatory Automatic Enrollment Coupled with Corrective Contribution Relief
Employees Plan to Make the Right Choice…Later
When it comes to choosing to save for retirement, people tend to be short-sighted. Many eligible employees don’t choose to participate in their employer-sponsored retirement plans. Behavioral finance studies show that people tend to imagine themselves making the right choices in the future, not today. Procrastination. Inertia.
Employers Can Make the Right Choice for Their Employees Through Automatic Enrollment
However, studies also show that the same inertia causes people not to resist if the employer makes the right choice for them. Hence, automatic enrollment in 401(k) plans significantly increases participation rates. Since 1998, automatic enrollment has boosted participation, especially for young and lower-paid employees who would not choose to participate.
Corrective Contribution Relief: Employers Feared that No Good Deed Goes Unpunished
Corrective Contributions can be expensive. Employers had historically been hesitant to start automatic enrollment plans, fearing that corrective contributions for improper exclusion of newly eligible employees could be costly. However, the IRS Correction Program, EPCRS, (Revenue Procedure 2021-30) does not require plan sponsors to make a corrective contribution for the elective deferrals that would have been contributed to an automatic enrollment plan had there been no improper exclusion through the extended due date of the Form 5500 for the plan year in question. However, if the participant notifies the plan sponsor of the error, then the contributions must begin on the first pay date of the month following the month of notification.
In addition, the plan sponsor must make a corrective contribution for any missed match or other employer contributions, plus earnings, that would have been contributed had the failure not occurred. A notice of the failure and corrective actions must be distributed to the affected participant.
The SECURE Act. 2.0 expands and clarifies the above correction can be used when the failure affects terminated employees, and that the correction is available even after the failure is identified by the IRS.
The Right Choice Becomes a Mandate for New Plans: New Plans MUST have Automatic Enrollment
Effective for plan years beginning after December 31, 2024, SECURE 2.0, Section 101 requires 401(k) and 403(b) plans to automatically enroll participants upon becoming eligible to an employer-sponsored plan. Of course, employees may opt out. The initial automatic enrollment amount is at least 3 percent but not more than 10 percent. Each year thereafter that amount is increased by 1 percent until it reaches at least 10 percent, but not more than 15 percent. All current 401(k) and 403(b) plans are grandfathered. There is an exception for small businesses with 10 or fewer employees, new businesses (i.e., those that have been in business for less than 3 years), church plans, and governmental plans. Section 101 is effective for plan years beginning after December 31, 2024.
Corrective Contributions for Plans Without Automatic Enrollment
Grandfathered plans that do not offer automatic enrollment must still abide by the computations provided on Appendix A.5(6) of EPCRS which provide that:
For 403(b) and safe harbor plans, the deemed lost salary deferral is the greater of:
- 3% of eligible compensation, or
- the maximum deferral percentage for which the employer provides a 100% match contribution (or greater)
Alternatively, employers can use the average deferral percentage of the employee’s group, (either Highly or Non-Highly Compensated Employees HCEs or NHCEs) as the base for the computation to which the corrective contribution factor is applied.
When the employer does not implement an election that was made by the participant on a timely manner, then the percentage elected by the participant should be used as the base for the corrective contribution computation.
Automatic Enrollment Corrections are Now Permanent, Simple, Affordable, and More Widely Available
Previous regulations and legislation have strived to make automatic contribution features more attractive to plan sponsors. SECURE 2.0 formalizes the favorable corrective contribution calculations for missed deferrals and allows the favorable correction terms to apply to terminated employees and to be used even if the IRS discovers the error first. It sets the stage for mandating that new 401(k) and 403(b) plans to adopt automatic enrollment provisions in a continued effort to improve retirement readiness by helping employees to make the right choice today.
Read more about the SECURE Act 2.0 in Maria Hurd’s Blog Series
- The SECURE 2.0 Act of 2022: Increased Retirement Savings; Enhanced Self-Correction of Operational Failures; Decreased Costs to Implement a Plan
- SECURE Act 2.0 Brings New and Improved Self-Correction Opportunities
- SECURE 2.0: Mandatory Automatic Enrollment Coupled with Corrective Contribution Relief for Automatic Enrollment Failures
- Coming Soon: SECURE 2.0: New Distribution Options
