Mandatory Auto Enrollment 1/1/2025 and beyond

[austin3515]

I have done a lot of research on this and talked to more than one attorney and this seems to be landing as follows:

1) When mandatory auto enrollment is being added to a plan that was effective before the EACA was effective, a "sweep" is not required. This can happen when either a) new plans established after 12/29/2022 with auto enroll mandated 1/1/2025; OR b) when a new plan is not subject to auto enrollment right away because of the <10 Employee exception and the new business (3 year) exception.

2) When mandatory auto enroll applies to a new plan on the effective date of the Plan, a sweep is required.  The law is less clear to me here, but if a Plan's Elective Deferrals are effective 7/1/2025, then there must be an active EACA on that date. So everyones plan entry date is 7/1/2025 and if no one is enrolled on 7/1/2025 then the plan did not include an EACA on 7/1/2025. That part I think is straightforward enough regarding why a sweep being required makes sense.  I had suggested in one conversation limiting application of the EACA to people who would have become eligible on 7/1/2025 even if the Plan was effective years ago but no one liked that idea (and thus not doing a sweep).  I personally think it works but I don't want to go too rogue.

I am somewhat surprised that there is not a lot more conversation and a lot more articles on this very topic.  This is going to be front and center really now as we establish new plans.  I am curious to know if anyone has come to these same conclusions or something different.  Too bad the IRS is letting us squirm without any guidance.  To me, to sweep or not sweep is the most important question facing our industry today.

Please discuss!

[Peter Gulia]

As you note, we lack a Treasury or IRS interpretation on the “sweep” question you raise.

Without that guidance, an affected plan sponsor might decide which participants to apply an automatic-contribution arrangement to. And if a plan’s sponsor doesn’t decide, the plan’s administrator might use its discretionary power to interpret the plan, including the unwritten but implied provisions. (Yes, I know that for a small-business employer both roles practically are filled by Jane B. Owner, and she often doesn’t get a lawyer’s advice.)

I can’t remark on the reasoning you describe because no client has asked me to interpret § 414A, and it’s not in the topics I regularly publish on.

Might the lack of agency guidance help? It might set up a tolerance for employers, TPAs, and recordkeepers to sort out what makes sense.

[austin3515]

Unless you don't do a sweep and the IRS says your plan is disqualified. Seems unlikely but who knows.

[Peter Gulia]

Over the 40+ years I’ve been working with retirement plans, the Internal Revenue Service has been remarkably consistent about recognizing an employer’s honest effort to meet tax law, especially when the relevant law is ambiguous and the IRS has not published guidance.

It might help for the plan’s sponsor/administrator to document its reasoning for its good-faith interpretation.