Any 401(k) or private sector 403(b) plan established on or after December 29, 2022 is required to begin automatically enrolling its eligible employees in the first plan year after December 31, 2024. Since most plans are on calendar years, this article discusses the requirements as if the plans are on a calendar year.

There are some exceptions, for example, for small employers and new employers. Those are discussed later in the article.

The affected plans must automatically defer at least 3% of pay for eligible employees, unless they elect out of participation. After that, the deferral rates must be increased by at least 1% per year until they reach 10% of pay. If desired, a plan can allow the deferral rate to increase to as much as 15%.

Finally, any defaulting participants—that is, who do not direct their investments—must be invested in a QDIA—a qualified default investment alternative. A QDIA could be a target date fund, a balanced fund or a managed account.

With that background, let’s turn to the proposed regulation and specifically to the provisions about:

• Pooled employer plans, or PEPs.
• Employees who must be automatically enrolled.
• Long-term, part-time (LTPT) employees.
• New employers.
• Small employers.

Pooled Employer Plans (PEPs)

Single employer plans and pooled employer plans, or PEPs, may be considered either as “pre-enactment” (or “old”) plans or “post-enactment” (or “new”) plans. An old plan is one that was established before the enactment of SECURE 2.0, which was December 29, 2022; a new plan is one that was established on or after the date of enactment. Generally speaking, old plans are not required to automatically enroll their eligible employees, but new plans are.

On the face of it, that’s a clear rule. However, there’s been a question of whether, when an old single employer plan joins a new PEP, the old plan would be considered to be a new plan. The IRS issued a Notice last year (2024-2) that suggested, but didn’t explicitly say, that the old single employer plan would be considered a new plan when it joined a post-enactment PEP, and therefore would need to start automatically enrolling its employees. As you might imagine, some sponsors of old plans were reluctant to join new PEPs. A considerable effort was made to educate the Treasury Department and the IRS on the consequences of that interpretation and its potential adverse impact on participating employees who might benefit from the investments and services offered by a PEP.

Fortunately, the proposed regulation provides that, in those circumstances, the part of a new PEP that consists of the old plan won’t be considered to be newly established and therefore won’t be required to automatically enroll its employees.

Employees who must be automatically enrolled

The critical date for the mandatory automatic enrollment rule is the date on which the 401(k) or 403(b) plan is established. That is, was the plan established on or after December 29, 2022, in which case the SECURE 2.0 provision would apply. However, plans did not need to begin automatically enrolling their employees until this year, 2025.

That raises questions about which employees must be automatically enrolled…only those who first become eligible in 2025?…those that became eligible between December 29, 2022 and 2025?…those that worked for the plan sponsor before December 29, 2022 and are still working there?

The answer is…all of them.

If an employee had affirmatively elected not to defer into the plan, that employee doesn’t have to be automatically enrolled.

There’s an exception. If an employee had affirmatively elected not to defer into the plan, that employee doesn’t have to be automatically enrolled. That may not be a meaningful exception, though, since few plans obtain affirmative elections to not defer. 

There’s another exception. That is, if an employee has elected to defer into the plan, that employee doesn’t need to be automatically enrolled. This shouldn’t be a surprise. It makes sense—because the participant enrolled on his or her own.

Long-term, part-time (LTPT) employees

Consistent with the rule that all eligible employees must be automatically enrolled, the IRS proposal says that LTPT employees must also be automatically enrolled.

As background, a LTPT employee is one who has worked at least 500 hours a year for two consecutive years—but, obviously, hasn’t worked enough hours to enter the plan as a full-time employee. Thus, if an employee worked 500 hours (up to 999 hours) in 2023 and 2024, the plan would need to automatically enroll the employee (but for deferrals only) in the first payroll in 2025.                 

Plan sponsors don’t need to make matching or profit sharing contributions for LTPT participants even if they do for full-time participants, but may do so at the plan sponsors election.

The requirement to automatically enroll LTPT employees may be a trap for the unwary because both the LTPT rule (from SECURE 1.0) and the automatic enrollment mandate (from SECURE 2.0) are new. Financial professionals should ensure that their plan sponsor clients are aware of this requirement.

A new employer is one that’s been in business for less than three years. 

New employers
A new employer is one that’s been in business for less than three years. During those years, an employer can sponsor a post-enactment 401(k) or 403(b) plan and won’t be required to automatically enroll its employees.

However, once the three years has passed, the plan must begin automatically enrolling its employees.

The proposed regulation clarifies that, if a plan sponsor hasn’t been in business for three years as of the beginning of a plan year, it doesn’t need to automatically enroll for that plan year. For example, if a plan is on a calendar year, and the employer complete its initial three years on March 1, 2025, it won’t need to begin automatically enrolling its employees until January of 2026.

Small employers

A small employer is one that “normally employs” fewer than 11 employees. Unfortunately, the phrase doesn’t appear elsewhere in the rules governing retirement plans. As a result, it needed clarification from the IRS so that employers would know when they are deemed to “normally” employ 11 or more employees.

In that process, the IRS adopted the calculation method used in the COBRA rules for continuation of health insurance. Those rules are complicated, but the essence is that a full-time employee counts as one employee and a part-time employee is considered to be a fraction of an employee based on hours worked (e.g., 20 hours worked over 40 hour work week equals .50, or 50% of a full-time employee).

If that formula results in there being 11 or more employees during 50% or more of the year, the employer is deemed to normally employ over 10 employees and therefore will be subject to the mandated automatic enrollment rule in SECURE 2.0. However, there is a one-year delay before the mandate applies.

Concluding thoughts

SECURE Acts 1.0 and 2.0 contained a long list of changes to the rules governing the design and operation of retirement plans. The IRS and DOL are still working through guidance under both Acts. Financial professionals need to keep abreast of regulations and other guidance in order to help their plan sponsor clients both take advantage of some of the new provisions, and to ensure that the plans are operated in a compliance manner. For example, it’s likely that some plan sponsors have inadvertently failed to automatically enroll their LTPT employees this year.

This is an area where financial professionals and plan service providers can help employers comply with the complex rules governing retirement plans.