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

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.
 

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?

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.

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.

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.

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.

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...

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.

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.

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.

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.   

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.

The notice of proposed rulemaking (to be published Tuesday, January 14) proposes a rule that would state:

“For earlier plan years [those for which the final rule does not apply], a plan is treated as having complied with [Internal Revenue Code § ]414A if the plan complies with a reasonable, good faith interpretation of section 414A.”

What does it say about future plan years? Anything?

Under the Treasury’s proposed interpretation, a § 414A arrangement must cover every employee who’s eligible to make a cash-or-deferred election.

The exception is for an employee who has in effect an affirmative election—whether for an amount or percentage of compensation to be deferred, or for no deferral (but it must be an affirmative election).

Let's talk in laymens terms.  They wanted us to do a sweep as of 1/1/2025, not just prospectively?

From the Treasury’s explanation of its proposed interpretation:

“The Treasury Department and the IRS received comments in response to Notice 2024-2 requesting that the guidance provide that certain categories of employees need not be covered by an EACA for section 414A(b) to be satisfied. However, although section 414A(c) provides several exceptions to the requirements of section 414A(a) for certain types of plans, there is no provision in section 414A (or in section 101(c) of the SECURE 2.0 Act) that excludes any category of employee from the automatic enrollment requirements of section 414A(b) of the Code if the plan is subject to section 414A(a). Accordingly, the proposed regulation would clarify that a CODA or salary reduction agreement under a plan satisfies the automatic enrollment requirements of section 414A only if the plan provides for an EACA that covers all employees in the plan who are eligible to elect to have contributions made on their behalf under the CODA or pursuant to the salary reduction agreement (including long-term, part-time employees described in section 401(k)(15) of the Code or section 202(c) of ERISA).

Commenters also requested guidance on whether an employee must be automatically enrolled if the employee was eligible to participate in a CODA or salary reduction agreement included in a plan before the CODA or salary reduction agreement became subject to the automatic enrollment requirements of section 414A(b). In response to these comments, the proposed regulation would provide an exception to automatic enrollment for certain employees who are eligible to make a cash or deferred election under a CODA or to enter into a salary reduction agreement that is comparable to the exception for certain current employees under a QACA, as set forth in § 1.401(k)-3(j)(1)(iii). Specifically, the proposed regulation would clarify that an EACA will not fail to satisfy section 414A merely because the default election under the EACA does not apply to an employee who, on the date the plan is first required to satisfy the automatic enrollment requirements of the proposed regulation, had an affirmative election in effect (that remains in effect) to have contributions made on the employee’s behalf under a cash or deferred election or a salary reduction agreement (in a specified amount or percentage of compensation) or not have contributions made on the employee’s behalf under a cash or deferred election or a salary reduction agreement.”

The proposed rule distinguishes between a “statutory applicability date” and a “regulatory applicability date.”

The Treasury’s explanation of its proposed rule includes this:

Regulatory applicability date
The proposed regulation WOULD apply to plan years that begin more than 6 months after the date that final regulations under section 414A are issued. {One guesses this would be no sooner than January 1, 2027.} For earlier plan years, a plan would be treated as having complied with section 414A if the plan complies with a reasonable, good faith interpretation of section 414A.

As explained in section I.B.1 of this Explanation of Provisions, the proposed regulation would require an EACA to cover all employees in the plan who are eligible to elect to have contributions made on their behalf for the automatic enrollment requirements of the proposed regulation to be satisfied. If a CODA or section 403(b) plan that provides for salary reduction agreements becomes subject to the requirements of section 414A(a) as of the first day of the plan year beginning after December 31, 2024 (2025 plan year), but employees who became eligible to participate in the CODA or to enter into a salary reduction agreement before the first day of the 2025 plan year (and who do not have affirmative elections in effect on that date) are not covered under the EACA, then those employees would have to be covered under the EACA on the first day of the first plan year that the FINAL regulations apply to the CODA or to the section 403(b) plan that provides for salary reduction agreements (first applicable plan year). 

As a result, under the proposed regulation, unless employees who became eligible to participate in the CODA or to enter into a salary reduction agreement before the first day of the 2025 plan year have affirmative elections in effect on the first day of the first applicable plan year, those employees would need to be automatically enrolled as of that date {the regulatory applicability date} in order for the requirements of the regulation to be satisfied. In that case, the default contribution percentage would be the percentage that would apply under the EACA for the first applicable plan year had those employees been automatically enrolled starting on the first day of the 2025 plan year. As an alternative, the plan terms could reflect the provision in the proposed regulation permitting the redetermination of the initial period in the case of an employee who did not have default elective contributions made for an entire plan year (so that the plan would be permitted to provide that the initial contribution percentage that applies to those employees is the percentage that would apply under the EACA had the initial period for those employees started on the first day of the first applicable {regulatory applicability date} plan year).

* * * * * *

If a plan’s administrator’s interpretation of the plan’s provisions before reading this proposed rule was for something less than the full “sweep”—that is, applying the plan’s default to every eligible employee who has no affirmative election in effect, such an administrator might continue its interpretation for 2025, and reconsider before interpreting the plan’s provisions for 2026—for example, before deciding the content of a notice that looks to 2026.

That assumes the administrator formed its interpretation for 2025 using no less care, skill, caution, and diligence than would be used by someone who is experienced with the needs of a similar retirement plan and with the fiduciary’s role in serving such a plan. It assumes also that the administrator’s interpretation is at least “a reasonable, good faith interpretation”, even if in the circumstances ERISA § 404(a) might permit a lower-quality interpretation.

This is not advice to anyone.

9 hours ago, Peter Gulia said:

If a plan’s administrator’s interpretation of the plan’s provisions before reading this proposed rule was for something less than the full “sweep”—that is, applying the plan’s default to every eligible employee who has no affirmative election in effect, such an administrator might continue its interpretation for 2025, and reconsider before interpreting the plan’s provisions for 2026—for example, before deciding the content of a notice that looks to 2026.

On 1/10/2025 at 11:14 AM, austin3515 said:

Let's talk in laymens terms.  They wanted us to do a sweep as of 1/1/2025, not just prospectively?

Yes, but it wasnt all that clear in my opinion, and that's why we get some relief since you can basically "catch up"  to cover all by the time the regulatory applicability date. My understanding is that if you do this, these "newly covered" employees would have to have their rates reflect what they would have been had the employee been auto enrolled 1/1/25.  So lets say I was eligible 1/1/24 but had no affirmative election on file.   I was not auto enrolled 1/1/25 at 3% because I was improperly excluded.  I could get auto enrolled 1/1/26 (or later depending on the effective date of the final regs), at the rate I should be at had I been auto enrolled 1/1/25. 

If the plan provides the initial default is 10% and the escalated default is 10%, would a difficulty about which default percentage to apply be avoided?

8 minutes ago, Peter Gulia said:

If the plan provides the initial default is 10% and the escalated default is 10%, would a difficulty about which default percentage to apply be avoided?

It should.  I haven't seen many plans actually default to 10% though.

Oh  boy I did not catch that (I wait for smart people like y'all to read them and tell me what they say, more efficient!). 

From Ferenczy, give this article a read for sure.

https://ferenczylaw.com/flashpoint-and-not-a-moment-too-soon-in-fact-a-little-late-mandatory-automatic-enrollment-guidance/?utm_source=brevo&utm_campaign=Flashpoint Mandatory Automatic Enrollment Guidance&utm_medium=email

I thought that the government would interpret the rules to permit a plan to exclude those who were participants when MAE came into effect from the automatic enrollment.  Derrin was less optimistic.  Derrin, it turns out, was right … for the most part.  While the MAE Regs require the broader enrollment, the Preamble clarifies that, if the plan did not apply MAE to participants who were already in the plan but did not make an affirmative election, they must do so by the first plan year for which final regulations are effective (e.g., 2027). Moreover, the default deferral rate for these employees must be computed as though they had been subject to MAE since 2025.  The complexity of administering this timing, and for participants to understand it, will likely be a source of confusion and operational failures. It may make sense just to cover the right people under the MAE provision sooner rather than later.  [1 point for Derrin, half a point for Ilene, -1 for anyone that has to track this.]

Some TPAs and recordkeepers suggested to clients setting the initial (and final) default percentage at 10%. Their reason was to avoid yearly auto-escalations, which might be error-prone.

The 10% works also to avoid difficulties about what default percentage applies to a participant the administrator didn’t apply a default to for 2025 and, if required, puts in later.

We encourage all of our clients to default to 10% MAE and probably 98% of them agree. We've had very little pushback.

Same.  There is zero chance that a small employer is going to be able to track automatic enrollment, much less automatic increase. This is not my assessment alone – this is their assessment as well. They are very busy making widgets, and hopefully making money. This is not how they want to spend their time.

36 minutes ago, austin3515 said:

Same.  There is zero chance that a small employer is going to be able to track automatic enrollment, much less automatic increase. This is not my assessment alone – this is their assessment as well. They are very busy making widgets, and hopefully making money. This is not how they want to spend their time.

We have been able to solve for AE and escalation in our RK system and other applications, but I know many are struggling with it.  100% agree we cant put that responsibility on clients.

If the plan has a sophisticated recordkeeper that is tracking eligibility AND deferral elections then obviously it is doable. Even better if there is a 360 bridge. But the reality is many employers do not have that kind of capability available to them. So for example, there might be a recordkeeper, but they may not be tracking eligibility because the requisite data to do so may not be exportable from payroll in a useable format.  Without full censsu data the RK cannot track eligibility and if you can't track eligibility than the RK cannot track auto enrollment.

Oh and even if the RK can track eligibility and deferrals the employer has to be super meticulous about always checking the RK for any deferral elections that were made (because emails get lost, missed and diverted to junk).  That's really hard to do if you have 15 employees (perhaps 5 contributers?) and one change every other year.

Bottom line is all but those with the most robust reporting capabilities really must use the 10% approach because the reality is they cannot track auto enrollment/increases on their own (i speak in general terms obviously some people can do this).  And I promise my description of the technology requirements above excludes a LOT of plan sponsors.  ergo a LOT of employers should be using this 10% approach.

1 hour ago, austin3515 said:

ergo a LOT of employers should be using this 10% approach.

If nothing else, 10% is probably a big enough contribution to push participants to make an affirmative election.

And may a plan provide that a claim for a 414w permissible-withdrawal distribution is treated as also an affirmative election for a 0% deferral?

2 hours ago, Peter Gulia said:

And may a plan provide that a claim for a 414w permissible-withdrawal distribution is treated as also an affirmative election for a 0% deferral?

I think it could.  How a participant makes an affirmative election should be an administrative procedure that the PS can adopt.

Interesting question but it seems but it seems hard to believe that a RK would allow such an election without a concurrent election to stop contributing... 

On 1/14/2025 at 5:43 PM, austin3515 said:

Interesting question but it seems but it seems hard to believe that a RK would allow such an election without a concurrent election to stop contributing... 

Circling back to this.  I brought this up in a webinar with Derrin yesterday, and he said no.  The withdrawal is separate from the election to defer and can't be conditioned on an affirmative election of 0%.  He cited 401(k)(4), benefits cannot be contingent on an election to defer.  The more I think about the more sense it makes.  The permissible withdrawal is an option for employees who were auto-enrolled, but nowhere does it say that you have to opt out of deferrals to exercise the option.   Best practice is to provide the participant requesting the withdrawal with the tools to change their deferral rate, and to explain that they have to make an election to stop or change the deferrals.  Otherwise, they get the distribution but the deferrals continue.

In theory, you could incorporate an optional affirmative election feature on the permissible withdrawal form or process make it as simple as possible.  That might be a possible issue for RK/payroll though.

There must be some record keepers out there reading this. It would be great to know how you all are handling this. It seems like if the withdrawal and election are not coordinated you’re going to get a lot of tail chasing…

RatherBeGolfing, thank you thinking about this and your above-and-beyond of asking Derrin Watson’s thinking.

Putting on the § 414(w) distribution claim form, whether software or paper, a distinct voluntary choice to elect a zero deferral might make sense if the service arrangements are such that the retirement plan’s recordkeeper processes participants’ elective-deferral elections, whether default or affirmative, and instructs the employer’s payroll manager (or payroll service provider) for what amount to take from each participant’s pay.

(I’m glad I have no client with an automatic-contribution arrangement.)

1 hour ago, austin3515 said:

There must be some record keepers out there reading this. It would be great to know how you all are handling this. It seems like if the withdrawal and election are not coordinated you’re going to get a lot of tail chasing…

RK isn't my department, but this is a conversation we are currently having.  99% sure we will now incorporate an optional affirmative election on the form (paper and electronic).  Currently, the election is separate from the permissible distribution.

@MoJo care to share what you guys are doing?