IRS Issues Proposed Regulations on Automatic Enrollment Requirement

One important provision of the 2022 SECURE 2.0 law is the requirement that most new 401(k) and 403(b) plans must institute automatic enrollment. This rule is effective for plan years beginning after December 31, 2024. A “plan year” is the plan’s 12-month fiscal year and is usually January 1 – December 31. So, many new plans became subject to automatic enrollment on January 1, 2025. On January 9, 2025, the IRS issued proposed regulations on this rule.

What is automatic enrollment? It’s a plan feature that requires covered employees to make elective deferrals to the plan unless they opt out. Automatic enrollment is not new. Over the last 15 years, many plans have voluntarily adopted this plan design as a way of boosting plan participation. But now it will be mandatory for most newly-established plans. A number of studies have shown that automatic enrollment is indeed an effective way of getting employees to start making 401(k) deferrals. However, some critics have argued that automatic enrollment effectively dupes many employees into contributing when they can’t afford it and that employees don’t understand that they can opt out.

The IRS proposed regulations say that several categories of plans are exempt from mandatory automatic enrollment (although employers of these plans are free to voluntarily adopt it):

• Grandfathered plans: When SECURE 2.0 was enacted, some news outlets reported that the new automatic enrollment rule applied to existing plans. That’s clearly not what the law says, and the IRS confirms this in the regulations. Any 401(k) or 403(b) plan adopted by the employer before December 29, 2022 (the effective date of SECURE 2.0) is grandfathered. That’s the case even if the plan did not start operating until after that date.

• Governmental and church plans: The IRS confirms that plans sponsored by governments or churches are exempt.
• Small employer plans: Companies that “normally” employ 10 or fewer employees do not have to comply. The regulations set out a complicated method for determining whether a small company meets that standard. In essence, a company is not exempt if it employs more than 10 employees during 50% of the company’s fiscal year. There are special rules for counting part-time employees.
• Plans of new businesses: Any business that, as of the beginning of the plan’s “plan year” has been in existence for less than three years is exempt.

Employers with plans subject to mandatory automatic enrollment can set the deferral rate for employees who don’t opt out or who elect a deferral rate higher than the one set by the employer. That rate must be at least 3% of pay and no more than 10% of pay. Each year after that, the employer must increase the required deferral rate by 1% until it reaches a rate of at least 10% and no more than 15% of pay. Any employee subject to automatic enrollment must be allowed to withdraw his deferrals within 90 days of the date of the first automatic contribution to the plan.

The proposed regulations aren’t technically effective until after the IRS issues final regulations. In the interim, plans should be able to rely on the proposed regulations.

IRS Issues Proposed Regulations on Automatic Enrollment Requirement