Auto Enrollment for New Plans - Auto Enroll Everyone or New Hires?

[austin3515]

On a webinar and they said something  I didn't think was right.  SECURE 2.0 only says that as of 1/1/2025 the plan must be an EACA.  An EACA need not be applied to all eligibles - it can be applied only to new hires (ok I don't get the extra time for my ADP test).

On the webinar they felt that the best reading was that the auto enrollment had to be a sweep on 1/1/2025, and pick up all eligibles.  But to me it is clear as day that only new hires must be subject.

the statute:

"An arrangement or agreement meets the requirements of this subsection if such arrangement or agreement is an eligible automatic contribution arrangement (as defined in section 414(w)(3)) which meets the requirements of paragraphs (2) through (4)."

Nothing in paragraph 2 through 4 has anything at all to do with the groupings of who needs to be auto enrolled.
 

[Peter Gulia]

Here’s new Internal Revenue Code § 414A, as compiled in the United States Code’s title 26.

(I have not compared this to the Statutes at Large to check whether the compilation is accurate.)

https://uscode.house.gov/view.xhtml?req=(title:26%20section:414A%20edition:prelim)%20OR%20(granuleid:USC-prelim-title26-section414A)&f=treesort&edition=prelim&num=0&jumpTo=true

Here’s one possible interpretation of the statute:

If no exception is met and § 414A applies regarding a plan, and

some employees are excluded from such a plan’s § 414(w)(3) eligible automatic contribution arrangement established to meet § 414A,

whatever ostensible cash-or-deferred arrangement those employees are eligible for is not a § 401(k) arrangement.

austin3515’s query is only one of many issues that call for interpretations of § 414A and Internal Revenue Code provision that affect or relate to § 414A.

Might some of those interpretations be the Treasury/IRS’s Black Friday greetings to practitioners on or about November 29, 2024?

[austin3515]

Its the same language as the statute.  Can you please explan why  the automatic enrollment provision requires something more than EACA when it only says it has to be an EACA?  There are no modifications that I can see to the "EACA" requirement (like a requirement to include ALL eligible employees).

Compare that with a QACA there is a clear statutory requirement to cover all eligibles.

[austin3515]

HEre is the QACA Language (401(k)(13)(C)(i):

The requirements of this subparagraph are met if, under the arrangement, each employee eligible to participate in the arrangement is treated as having elected to have the employer make elective contributions in an amount equal to a qualified percentage of compensation.

Clear as day for a QACA.  No such language exists for this new SECURE 2.0 EACA Requirement.

[Peter Gulia]

Yesterday evening, reacting to your description of what webinar speakers said, I indulged a moment’s curiosity about possible interpretations of § 414A, and observed that the described interpretation is a possible interpretation.

Other interpretations, including what you suggest, also are possible.

I have not thought about strengths and weaknesses of imaginable interpretations of § 414A.

It might be a while before we know what rule the Treasury department proposes (if any) or what nonrule interpretation the Internal Revenue Service publishes (if any).

Or, some indirect practical guidance might happen in the IRS’s reviews, perhaps beginning February 1, 2025, of submissions for cycle 4 opinion letters.

[austin3515]

There is no more a requirement to do a sweep then there is to be aQACA or add hardship distributions. There just is nothing in the statute that even suggests a sweep by inference or subtlety or anything.  I guess it’s just frustrating for me that there wouldn’t be more agreement on this. There are not that many words here so I am surprised at other interpretations of this straightforward text.

[austin3515]

Well here we are with 3 months to go.  Any more clarity here?  This is insane that this question is not answered.  It's go time...

[Peter Gulia]

I’m not aware of Treasury or IRS having published an answer to this question. And I don’t know whether this question has even been suggested to the IRS.

Not every ambiguity in tax law gets a timely publication of the Treasury’s or IRS’s interpretation.

Sometimes, an employer or plan administrator must form one’s own interpretation about what tax law requires or permits. An employer might want evidence that it in good faith made a reasoned interpretation of the statute. To do so, one might want its lawyer’s or certified public accountant’s written advice.

austin3515, I don’t disagree with your reading of the statute; rather, I have not formed my reading. (I have no client with a cash-or-deferred arrangement not established before December 29, 2022. And it’s unlikely I ever will have a client subject to I.R.C. § 414A.)

BenefitsLink neighbors, here’s a way to gather information one could use to advise one’s client:

Of those recordkeepers active in providing services to small plans, have they built their services to support automatic-contribution arrangements assuming there must be a sweep to bring in those who became eligible before 2025?

Does a recordkeeper allow its customer to specify that its automatic-contribution arrangement applies only to those who become eligible after 2024?

While I don’t suggest a practitioner rely on a recordkeeper’s interpretations or business practices, sometimes a plan sponsor’s or plan administrator’s decision-making might be influenced by knowing what services are or are not available from one’s recordkeeper.

[Ecianas]

Totally get your confusion. It seems like the law allows auto-enrollment only for new hires, not all eligibles. The webinar's take on a full sweep feels off.

[austin3515]

Where I personally land is that we all seem to agree that the law does not say there is a requirement for a sweep.  You only have people who are saying it was "probably what they meant."  I fail to see how anyone can be faulted for applying what the law actually says.  Now if you limited your EACA to anyone whose last name started with a Z I'd be concerned for you.

[RatherBeGolfing]

20 hours ago, austin3515 said:

You only have people who are saying it was "probably what they meant."  I fail to see how anyone can be faulted for applying what the law actually says.

100% agree.   

[Peter Gulia]

Two further thoughts:

When there is no Federal court decision, Treasury rule (final, temporary, or proposed), IRS guidance, Tax Court opinion, or other authority, “a taxpayer may have substantial authority for a position that is supported only by a well-reasoned construction of the applicable statutory provision.” 26 C.F.R. § 1.6662-4(d)(3)(ii) https://www.ecfr.gov/current/title-26/part-1/section-1.6662-4#p-1.6662-4(d)(3)(ii). If there is no Treasury rule, a substantial-authority position is one a tax return need not disclose, and it gets a reasonable-cause excuse from an understatement penalty. That might matter to a taxpayer, or a tax preparer. Also, it might matter for the professional conduct of a practitioner who practices before the Internal Revenue Service. See 31 C.F.R. §§ 10.33, 10.37.

When there is no authority beyond the statute itself, a well-reasoned interpretation of the statute might be a “more likely than not” position. See Financial Accounting Standards Board, Accounting Standards Compilation Topic 740, Income Taxes [compiling Statement No. 109, Accounting for Income Taxes (Feb. 1992), Interpretation No. 48, Accounting for Uncertainty in Income Taxes (June 2006), and many Accounting Standards Updates]. That might matter if the plan has GAAP financial statements, or if the employer has GAAP financial statements and something depends on the plan’s or § 401(k) arrangement’s tax-qualified treatment.