- August 8, 2025
Earlier this year, the Internal Revenue Service (“IRS”) released proposed guidance addressing the automatic enrollment requirements introduced under SECURE 2.0 (“IRS Guidance”). Essentially, SECURE 2.0 required that, with limited exception, all new 401(k) and 403(b) plans established on or after December 29, 2022 (“Effective Date”) must include an automatic enrollment feature (“Mandatory Auto Enroll”). Mandatory Auto Enroll requires employers to automatically enroll employees at a minimum deferral rate of 3% of their compensation and also automatically increase that deferral rate by at least 1% annually up to a maximum of 10% of compensation. As typically occurs with statutory mandates, many operational details were not discussed within the law thereby creating the necessity for clarification in the form of the newly proposed IRS Guidance. The following summarizes the key points of the IRS Guidance. However, it is important to recognize that the IRS Guidance remains in proposed form which means that substantive changes could occur before the guidance is finalized.
Covered Employees
Mandatory Auto Enroll applies to “employees”. The IRS Guidance further confirms that Mandatory Auto Enroll applies to long-term, part-time employees and to current employees who do not already have an affirmative deferral election agreement in place. However, any employee can opt out of Mandatory Auto Enroll by making an affirmative deferral election to do so.
Counting Employees
Certain exceptions exist that allow the sponsor of a 401(k) or 403(b) plan established after the Effective Date to avoid the application of Mandatory Auto Enroll. One such exception exists if the sponsor “normally employs” 10 or fewer employees. The IRS Guidance clarifies how this employee count is determined for purposes of satisfying an exception to Mandatory Auto Enroll.
First, self-employed individuals, corporate directors and independent contractors do not count towards the employee count. Second, a full-time employee counts as a single employee but a part-time employee counts as a fractional employee based upon the number of hours typically worked per week divided by the number of hours worked by a full-time employee per week (which may not exceed 40 hours). For example, if a part-time employee typically works 20 hours per week, he or she would count as one-half of an employee for purposes of this calculation (20 hrs / 40 hrs = 0.5).
Finally, the plan sponsor normally employs more than 10 people if it employs more than 10 people for at least 50% of the year.
Plan Amendments
After Mandatory Auto Enroll was introduced under SCURE 2.0, many were concerned about whether certain post-Effective Date plan amendments might trigger Mandatory Auto Enroll even for plans established prior to the Effective Date. However, the IRS Guidance indicates that plan amendments, even if they alter eligibility or other provisions of an elective deferral contributions feature, will not trigger Mandatory Auto Enroll for plans established before the Effective Date.
Multiple Employer Plan (“MEP”) Mergers
Another Mandatory Auto Enroll operational question raised by industry practitioners involved “multiple employer plans” (“MEPs”). More specifically, what happens if a plan established prior to the Effective Date and therefore exempt from Mandatory Auto Enroll was merged into a MEP that was established after the Effective Date and therefore subject to Mandatory Auto Enroll. Under the IRS Guidance, plans established prior to the Effective Date would maintain their exemption from Mandatory Auto Enroll despite the fact that the MEP was established after the Effective Date.
Non-MEP Plan Mergers
With regard to plan mergers that don’t involve a MEP, the IRS Guidance sets forth different merger rules. More generally, the IRS Guidance logically confirmed that if two plans established prior to the Effective Date are merged, they will not be considered a new plan for purposes of triggering Mandatory Auto Enroll. However, when a MEP is not involved in the transaction, a plan established prior to the Effective Date merged with a plan established after the Effective Date is required to follow Mandatory Auto Enroll. There is an exception to the prior sentence though.
In the context of a business merger or acquisition, an acquiring company has until the end of the calendar year after the year that included such transaction to merge the plans and avoid the application of Mandatory Auto Enroll. However, to take advantage of this exception, the plan established prior to the Effective Date must be the surviving / ongoing post-merger plan.
Spinoffs
With respect to spinoffs, if the original plan was established prior to the Effective Date, any spinoff from that original plan shall remain exempt from the mandatory automatic enrollment requirements.
We hope that this article helped you to better understand these topics. However, please be advised that this article is not intended to serve as financial, tax or legal advice so it should not be construed as such. Further, it discusses proposed rules which are subject to change before being issued in final form by the IRS at a later date. If you have questions about this topic, we strongly urge you to further discuss it with a qualified retirement plan professional. For more information about this topic, please contact our marketing department at 484-483-1044 or your administrator at Legacy.