IRS, Treasury propose guidance for auto enrollment, catch-up contributions

A rule from the Secure 2.0 Act requiring new retirement plans to automatically enroll workers took effect this year, and proposals issued just last week by the IRS and Treasury are sorting out some of the details for plan sponsors.

In most cases, plans established after Dec. 29, 2022 will have to use auto enrollment, with exceptions for new and small businesses, or those that are less than three years old or have fewer than 11 employees, respectively. And companies must comply with the Secure 2.0 rule under “a reasonable, good faith interpretation of the statute,” in absence of final versions of the Internal Revenue Service and Treasury rules that could be published later this year.

In that sense, the guidance is coming a little late. Employers will have to abide by the final rules six months after they are published, and it is unclear when that will happen.

Affected plans must automatically enroll workers, starting with at least a 3 percent contribution rate, raising that by one percentage point annually until it hits 10 percent of a worker’s pay, according to the IRS. That would apply to part-time workers who are eligible for company plans.

Like automatic enrollment requirements made by individual states, employees have the right to opt out.

However, at least one lingering question about the automatic enrollment requirement appears to be answered in the proposals. That is, 401(k)s that started before Dec. 29, 2022 may not be forced to use auto enrollment, even if the employer moves the plan to an multiple employer plan or pooled employer plan, said Jason Roberts, CEO of the Pension Resource Institute. That’s the case even when the MEP or PEP itself was launched after that deadline, he said.

“You had a bunch of these plans that for various reasons, automatic enrollment isn’t a great fit,” he said. With the proposed rules, “you don’t lose your grandfathered status if you merge your pre-enactment plan into some other group arrangement like a MEP or PEP, irrespective of when the MEP or PEP was created.”

A source of confusion will be how to handle some employees who became plan participants before this year, Ilene Ferenczy, managing partner at Ferenczy Benefits Law Center, wrote in a blog post about the proposed rules. The preamble to the rules explains that “if the plan did not apply [mandatory automatic enrollment] 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),” Ferenczy wrote. “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.”

Separately, the IRS and Treasury also published proposed rules to give guidance for new catch-up contribution limits under Secure 2.0. That includes a forthcoming requirement that people 50 and older with wages above $145,000 have catch-up contributions limited to a Roth basis, rather than pre-tax basis. It also addresses higher catch-up limits under Secure 2.0 for people ages 60 to 63, which for tax year 2024 were $11,250, or 150 percent of the normal $7,500 limit.