A year ago, we wrote about the new Federal mandate that certain 401k and 403b Plans must have automatic enrollment for employees who do not make a contribution election or who do not formally opt-out. In other words, the default is to automatically take deductions from an employee’s pay. Annual increases in the rate of contribution (i.e., auto-escalation) is also required by the mandate. Please read more about the details at https://acsi-ny.com/your-retirement-plan-may-soon-be-required-to-automatically-enroll-employees/.
The automatic enrollment rules are mandatory for the plan year beginning in 2025, i.e., January 1, 2025, for calendar year Plans. However, the mandate only applies to Plans “established” after December 28, 2022. The IRS issued guidance in late December that importantly clarified that the Plan’s “adoption date” – typically the date the Plan document is signed – determines when it was established. In other words, if the Plan was signed before December 29, 2022, even though the Plan did not begin until 2023, the Plan is not covered by mandatory automatic enrollment.
Please keep in mind that the mandate is temporarily delayed, if the business has not been “in existence” for three years, or until the employer “normally” employs more than 10 employees. The recent IRS guidance did not explain the meaning of “in existence” or “normally” for this purpose.
We expect more guidance in 2024, addressing (1) whether automatic enrollment only applies to those who become eligible for the Plan after 2024 or all employees without a contribution election or opt-out election as of 2025, and (2) if auto-escalation only applies to those who are default-enrolled or all Plan participants.
Those Plans that are subject to the automatic enrollment rules will need to establish internal operational procedures and arrangements with payroll providers, to be operationally compliant. Some Plans also may have to be amended before 2025, depending upon decisions that are made about implementing automatic enrollment.
ACSI will watch for IRS guidance and continue to provide updates. If you have questions about whether automatic enrollment is expected to apply to your Plan, please reach out to your ACSI contacts.
