Key Information About SECURE 2.0’s Mandatory Eligible Automatic Contribution Arrangement

Previously, Americans had to make a choice to participate in their workplace’s 401(k) plan by actively choosing to make salary deferral contributions, be they pre-tax, Roth, or after-tax, by filling out enrollment forms provided by the employer. The employee could choose not to participate if they wished to do so. However, with the enactment of Section 101 of SECURE 2.0, newly established 401(k) and 403(b) plans will be required to include an eligible automatic contribution arrangement, or EACA.

This EACA requirement is applicable to all new 401(k) and 403(b) plans established after December 29, 2022 (the SECURE 2.0 enactment date), effective for plan years beginning after December 31, 2024. This requirement does not apply to any qualified plans established before December 29th, 2022 or to any annuity contract purchased under a plan established before that date. Therefore, any plans that are established on or after December 29, 2022, should either begin as an “auto-enrollment” plan or will need to be converted to an automatic-enrollment plan in 2025.

A plan is considered “established” on the date the plan terms setting forth the salary deferral arrangements are adopted initially, even if the terms become effective at a later date. Therefore, for 401(k) plans, the key governing date is the plan adoption date.

The criteria for 403(b) plans are a bit more forgiving. Under the new rules, a section 403(b) plan is excepted from the new EACA requirements if it was established before December 29, 2022, without regard to the date of the adoption of plan terms that provide for salary deferral agreements. Therefore, a 403(b) plan which was established prior to the SECURE 2.0 enactment date will be grandfathered in and fall under the exception to the new EACA requirements. 

If a single employer plan that was established prior to the enactment date and is merged with another plan which was also established prior to the enactment date, the subsequent new plan will still be treated as a pre-enactment date plan and will not be subject to the new EACA requirement. This result is the same if a single pre-enactment employer plan is merged with a plan maintained by more than one employer that includes a pre-enactment salary deferral contribution agreement document.

If a plan that includes a qualified pre-enactment salary deferral contribution agreement document is spun-off into a plan that includes a qualified agreement document, the new subsequent plan will generally also be treated the same as it was prior to the SECURE 2.0 effective date. However, if the plan from which the new plan was spun off was a pre-enactment plan maintained by more than one unrelated employer, then the spun-off plan is treated as a pre-enactment plan only if the original plan was treated as a pre-enactment plan of the employer sponsoring the spun-off plan.

For plans which will now be required to have an EACA within their plan provisions, employees must be automatically enrolled into an EACA which has certain provisions. Plans must automatically enroll employees at a minimum rate of 3% of compensation, but not more than 10%. These plans must also automatically increase salary deferral rates by 1% annually up to at least 10%, but not more than 15% of compensation.  An initial default deferral rate of 10% of pay would eliminate the mandatory annual escalation provision. Employees must still have ability to opt out of plan participation or choose a different deferral rate. Within 90 days of the first deferral made under automatic enrollment, participants must have an opportunity to elect to withdraw all of the deferrals made to the plan, plus any earnings.

We know that these new rules are complex, and we are here to help. If you have any questions about this new requirement, please contact us.