The various automatic deferral contribution arrangements in qualified retirement plans can be helpful and a headache at the same time. By making participation the plan default, the inertia of eligible employees boosts retirement savings. On the other hand, the notice requirements, missed enrollments, and occasional unhappy participants come with the package. But plan sponsors can weigh the benefits and the baggage and decide if auto enrollment is a good fit for them. That is until SECURE 2.0 came along.
Section 101 of SECURE 2.0 requires that any CODA (cash or deferred arrangement) that is “established” after December 29, 2022 (the “enactment date”) must include an EACA (eligible automatic contribution arrangement). An EACA is an automatic enrollment arrangement that allows a 90-day permissive withdrawal period and other beneficial provisions. This requirement means any 401(k) plan or 403(b) plan with a salary reduction feature adopted after this date is required to automatically enroll eligible employees as of plan years beginning on or after December 31, 2024.
It seems like a fairly bright line to determine which plans are affected. But when you start looking at real life situations, this seemingly straightforward criteria can quickly get confusing. The only special situation that SECURE 2.0 specifically addresses is where an employer adopts a multiple employer plan after the enactment date. The statute provides that if the multiple employer plan was established before the enactment date, then the participating employer is not required to include an EACA, even if the employer joins the multiple employer plan after December 31, 2024. In many situations, the date of a plan’s establishment may be hard to ascertain. What is the establishment date for merged plans, or for plans that result from a spinoff of assets? Does “established” refer to the adoption date or to the effective date of the CODA feature?
Luckily, the IRS issued some clarification on these conundrums in the form of Q&As in Notice 2024-02 (the “Notice”). Here is what we now know:
- When a Plan is “Established.” The Notice poses the situation where a 401(k) plan adopted provisions for a CODA on October 3, 2022 (before the enactment date), providing for the CODA to become effective January 1, 2023 (after the enactment date). Which date is the date the CODA was “established”? The IRS answer is that the plan in this example was “established” on October 3, 2022, prior to the enactment date. So, it would seem that the key date for 401(k) plans is the date that the CODA provisions are adopted, rather than their effective date. (See Q&A-1). The criteria for 403(b) plans is a little broader, with the operative date being the effective date of the entire plan , not the effective date or the adoption date of the CODA provisions. (See Q&A-5) Therefore, 403(b) plans established prior to the enactment date are considered to be pre-enactment plans without regard to the date that the plans’ CODA provisions were adopted.
- Plan Mergers. When two plans are merged, is the resulting plan a “new plan” with a new “established” date? What if one plan was established before the enactment date and the other was established after the enactment date?
- Merger Does Not Trigger a New Established Date. The Notice explains that when two plans that were established before the enactment date are merged into a single plan after the enactment date, the surviving plan will be considered established before the enactment date. This means that a merger of two plans that were not subject to the EACA requirement before the merger, will not be subject to the EACA requirement once they are merged. (See Q&A-2)
- Surviving Plan is Considered Established Before Enactment Date. If a plan that was established after the enactment date is merged with a plan that was established before the enactment date, the resulting plan will not be subject to the EACA requirements if: (i) the surviving plan is the plan that was adopted before the enactment date; and (ii) the merger occurs before the end of the Code Section 410(b) transition period (generally the last day of the plan year following the year of an acquisition). Note that this means if the plan established after the enactment date is the surviving plan, or the merger of plans occurs after the end of the 410(b) transition period, then the EACA requirements will apply. (See Q&A-3)
- Plan Spin-Off. What if plan assets from a plan that was adopted before the enactment date are spun off into a new plan after the enactment date? The spin-off results in the establishment of a new plan after the enactment date, so is that new plan subject to the EACA requirements? The Notice says no, the new plan holding assets from a plan established before the enactment date would be considered a plan that was established before the enactment date. The idea here is that while a new plan has been created for the spun-off assets, the CODA that resulted in those assets was established on the same date as under the original plan. (See Q&A-4)
Now is the time to look at whether recently established plans will be subject to this requirement in 2025. But even after January 1, 2025, the EACA requirement can spring into effect down the road, whenever there is a merger of plans if the conditions are right.