New IRS Guidance Addresses Automatic Enrollment and Certain Notice Requirements: 

On January 10, the IRS published proposed regulations providing guidance on several provisions of the SECURE 2.0 Act of 2022 (“SECURE 2.0”).

First, under SECURE 2.0, certain 401(k) and 403(b) plans must include an automatic contribution feature, under which:

• The uniform percentage of compensation contributed by participants during their first year of participation is at least 3% but not more than 10% (unless they elect otherwise);
• Effective as of the first day of each plan year after an employee’s initial participation under this feature, that uniform percentage is increased by 1% (to at least 10%, but not more than 15%) unless the participant elects otherwise; and
• If a participant for whom contributions are made pursuant to this feature fails to make investment elections, those contributions must be invested in accordance with Department of Labor (“DOL”) regulations governing qualified default investment alternatives. 

Those provisions do not apply to 401(k) or 403(b) plans that were established before December 29, 2022, or to governmental plans or church plans. There are also exceptions for certain new businesses and certain small businesses. Also, SECURE 2.0’s applicable grandfathering provisions do not apply to employers that, after December 29, 2022, adopt a multiple employer plan that existed on December 29, 2022.

Per SECURE 2.0, those automatic contribution provisions are required for plan years beginning after December 31, 2024 (for plans to which those provisions apply).

Under the January 10 proposed regulations, exceptions are provided with respect to the rule that the contribution percentage under the default election for each employee’s initial period must be a uniform percentage that is not less than 3% and not more than 10%. For example, a plan can provide that the percentage used for the default election varies based on the number of years (or portions of years) since the beginning of the initial period for an employee.

In addition, the proposed regulations address the situation where a participant becomes ineligible for the plan but then becomes eligible again. If, for an entire plan year, no default elective contributions were made solely because the employee was not eligible during that plan year, a plan can provide that the employee’s initial period is redetermined (so it begins on the date the employee is again eligible).

The proposed regulations also apply to a wide array of plan merger situations (with respect to whether the resulting plan is subject to these SECURE 2.0 automatic contribution rules), and they also address SECURE 2.0’s grandfathering provisions for certain new businesses and certain small businesses. Those provisions are beyond the scope of this article, however.

Second, the proposed regulations provide guidance on SECURE 2.0’s provisions regarding participants who elect not to participate in their employer’s defined contribution plan. Under those provisions, no disclosure, notice, or other plan document must be furnished under Title I of ERISA or under the Code to any “unenrolled participant” if he or she receives (1) an annual, detailed reminder notice of such participant’s eligibility to participate in the plan and any applicable election deadlines under the plan; and (2) any document requested by such participant that he or she would be entitled to receive notwithstanding this SECURE 2.0 provision.

The term “unenrolled participant” means an employee who:

• Is eligible to participate in the plan;
• Has received the summary plan description and any other notices related to eligibility under the plan required to be furnished under Title I of ERISA or under the Code in connection with his or her initial eligibility to participate in the plan;
• Is not participating in the plan; and
• Satisfies other criteria as the DOL may determine appropriate, as prescribed in guidance issued in consultation with the IRS.

For purposes of this provision, any eligibility to participate in the plan following any period for which the employee was not eligible to participate will be treated as initial eligibility. This provision applies to plan years beginning after December 31, 2022.

Third, the proposed regulations provide guidance on SECURE 2.0 provisions allowing the emergency savings accounts (“ESAs”) initial and annual notices (if a plan provides for ESAs) to be combined with any other notice under ERISA (e.g., automatic contribution arrangement) or under certain Internal Revenue Code sections (e.g., eligible automatic contribution arrangement), if the other notice is provided to the participant at the time required for that notice. The proposed regulations add that the combined notice must:

• Include the required content;
• Clearly identify the issues addressed therein;
• Be furnished at the time and with the frequency required for each notice;
• Be presented in a manner that is reasonably calculated to be understood by the average plan participant; and
• Not obscure or fail to highlight the primary information required for each notice.

The proposed regulations are proposed to apply to plan years that begin more than 6 months after the date that final regulations are published.. A future edition of The Speed Reader will let you know when that occurs.