Automatic Enrollment Under SECURE 2.0

As seen in our 2023 EOY Newsletter: Click Here

Kristin Tocket, CPC, QPA, QKA, TGPC

One of the many changes under SECURE 2.0 is the expansion of automatic enrollment in 401(k) and 403(b) plans.  With automatic enrollment, employers will automatically withhold employee contributions at a default rate from eligible employees’ wages. To avoid being automatically enrolled, eligible employees must affirmatively make a deferral election, or choose not to participate.  If they do not take any action, they are enrolled at the plan's default rate.

Prior to the enactment of SECURE 2.0, automatic enrollment was an optional feature in retirement plans. However, with these recent changes, most plans established after December 29, 2022 will be required to implement automatic enrollment for plan years beginning in 2025. The following are exempt from the mandate:

• Small businesses with 10 or fewer employees

•  New businesses (those that have been in business for less than 3 years)

• Church Plans

• Governmental Plans

• 401(k) and 403(b) plans that were established prior to December 29, 2022

To meet the requirements under SECURE 2.0, sponsors must implement an Eligible Automatic Contribution Arrangement (EACA) that would include the below features:

• Initial default contribution rate of a least 3% but no more than 10%

• The default contribution rate must automatically increase by 1% each year until the rate reaches at least 10%, but no more than 15%

• 90-day permissive withdrawal feature (participants are allowed to withdraw any contributions made under the automatic enrollment feature within 90 days)

Participants who are automatically enrolled must be invested in a vehicle that meets the DOL’s requirements for a  Qualified Default Investment Alternative (QDIA)

Employer contributions are not mandatory with an EACA unless the plan document indicates otherwise, such as a safe harbor contribution or a fixed matching contribution. If an employer intends on sponsoring a Safe Harbor plan, they should consider utilizing a Qualified Automatic Enrollment Arrangement (QACA), as opposed to an EACA. While a QACA must meet the same requirements as listed above, these plans can utilize a reduced match formula as compared to a traditional safe harbor match, as well as requiring up to two years of service to become vested.

For more information on adding an automatic enrollment feature to your plan, or any other plan design questions, please contact your plan consultant.

Using Forfeitures In Defined Contribution Plans

As seen in our 2023 EOY Newsletter: Click Here

 by: Aaron Epstein, QKA

The term “forfeiture” refers to the non-vested portion of a former employee’s account balance in the plan. For example, if a participant is 40% vested in their profit sharing account source when they terminate, the remaining 60% of his profit-sharing account balance will become a forfeiture.

Plan sponsors can use forfeitures in defined contribution plans to take any of the following three actions:

1. Reduce employer contributions Under this option, the forfeitures offset a portion of the contribution the employer would otherwise make under the plan. For example, assume a company has a forfeiture account balance of $3,000. The company decides to make a profit-sharing contribution of 10% of compensation for the year, which equals $35,000. In this case, the company could deposit $32,000 toward the contribution from employer general funds and use the $3,000 in the forfeiture account to bring the total contribution allocation to $35,000.

2. Enhance employer contributions A plan may use forfeitures to provide additional allocations for participants. Under this option, the forfeiture allocated represents an increase to the contribution the employer would otherwise make under the plan. In the example above, if the company’s target profit sharing contribution was $35,000, and they had $3,000 in the forfeiture account, the company could deposit $35,000 toward the contribution from employer general funds and use the $3,000 in the forfeiture account to provide an enhanced profit-sharing contribution of $38,000.

 3. Payment of plan-related administrative expenses A plan may provide for the use of forfeitures to first pay reasonable administrative expenses. To the extent forfeitures exceed the amount required to pay expenses, the excess could be used to reduce or enhance employer contributions.

Most defined contribution plan documents include language authorizing all 3 forfeiture uses described above.

In April 2023, the IRS released proposed regulations on forfeiture accounts, including timing for the use of forfeitures. In these proposed regulations, the IRS re-emphasized the existing rule that a plan must use forfeitures no later than 12 months after the close of the plan year in which the forfeiture occurred. For example, if a forfeiture occurs in a calendar year plan in 2024, the forfeiture would have to be used to reduce employer contributions, enhance employer contributions, or pay plan expenses by 12/31/2025.

The proposed regulation has formalized this timing requirement. The proposed regulation also provides for a transition rule. Under the transition rule, any forfeitures that were incurred in any plan year beginning before 2024 are treated as having been incurred in the first plan year that begins on or after 01/01/2024, and must be used no later than 12/31/2025 for a calendar year plan.

In summary, plan sponsors should review their plan document to confirm that it provides for the 3 allowable options regarding how forfeitures may be used. If the document does not currently include all 3 options, it can be amended. Plan sponsors should make sure that the timing of forfeiture use is in compliance with regulations. They can take advantage of the transition rules to utilize any forfeitures incurred prior to 2024 by the end of the 2025 plan year.

Now that the IRS has formalized the timing requirements for forfeiture use, it stands to reason that they are less likely to be forgiving of violations of this requirement.