SECURE 2.0 Incentivizes Plan Sponsors to Promptly Correct Automatic Enrollment and Automatic Escalation Errors

We often are asked how to correct automatic enrollment and automatic escalation errors in 401(k) and 403(b) retirement plans. The fix typically has required plan sponsors to make qualified nonelective contributions (“QNECs”) for affected participants, in the amount of either 25% or 50% of the missed deferrals, plus earnings. However, a zero-dollar alternative was available for certain promptly corrected failures that began on or before December 31, 2023, and the SECURE 2.0 Act of 2022 (“SECURE 2.0”) expanded this safe harbor and made it permanent. This post will:

• Explain the requirements plan sponsors must follow to utilize the safe harbor correction method for automatic enrollment and automatic escalation errors;
• Offer practical steps plan sponsors can take now to use the safe harbor; and
• Serve as a reminder to plan sponsors that the ability to self-correct errors depends on having compliance practices and procedures in place for the plan.

Before SECURE 2.0

The IRS guidance for retirement plan corrections, Rev. Proc. 2021-30, contained a safe harbor correction method for 401(k) plans and 403(b) plans with automatic enrollment or automatic escalation errors that began on or before December 31, 2023. The safe harbor was not available to correct errors that began after December 31, 2023.

What Changed Under SECURE 2.0?

Section 350 of SECURE 2.0 added a new Internal Revenue Code section 414(cc), which codified and expanded the pre-SECURE 2.0 safe harbor correction method to include automatic enrollment or escalation errors that began after December 31, 2023.

The statute

Section 414(cc) requires that the error must be a “reasonable administrative error” that is corrected:

• For all similarly situated participants in a nondiscriminatory manner; and
• No later than the affected employee’s first paycheck on or after the earlier of:
  • The end of the month following the month in which the affected employee notifies the employer of the error; or
  • The last day of the 9½-month period after the end of the plan year in which the error first occurred.

Section 414(cc) also requires that notice of the error be given to the affected employees not later than 45 days after the date on which correct deferrals begin, and that the notice satisfies content requirements in IRS guidance and regulations.

In addition, Section 414(cc) expands the scope of self-correction because it permits the correction to occur:

• Before or after the participant has terminated employment; and
• Without regard to whether the IRS identifies the error.

IRS guidance

IRS Notice 2024-2 (at Part II, Section I) clarifies that plan sponsors may use the safe harbor correction method outlined in Rev. Proc. 2021-30, Appendix A, section .05(8), including the notice provisions. Section .05(8)(c) sets forth content requirements for the required notice to affected employees and the deadlines for distributing the notice. The notice must:

• Include the plan name and plan contact information (including name, street address, e-mail address, and phone number of a plan contact);
• Provide general information relating to the failure (such as the percentage of compensation that should have been deferred and the approximate date deferrals should have started);
• Inform the individual that corrective allocations relating to missed matching contributions have been made (or will be made);
• Inform the individual that correct deferrals have begun (or will begin shortly); and
• Inform the individual that they may increase their deferral percentage to make up missed deferrals (subject to the Internal Revenue Code 402(g) limit and, if applicable, the applicable limit under Internal Revenue Code §414(v)).[1]

What about matching contributions?

SECURE 2.0 did not relax the requirement that plan sponsors make a corrective contribution equal to the amount of matching contributions, if any, that would have been made for the participant’s missed elective deferrals, adjusted for earnings. To qualify for no QNECs with respect to the missed elective deferrals, the plan sponsor must make a corrective allocation of matching contributions by the last day of the sixth month following the month in which correct elective deferrals begin.

Practices and procedures

While SECURE 2.0 significantly expanded self-correction opportunities for retirement plan sponsors, errors can be self-corrected only if the plan sponsor has established and follows compliance practices and procedures for its plans. The practices and procedures must be reasonably designed to promote and facilitate compliance with the rules governing retirement plans.

Action Steps for Plan Sponsors

As we look ahead to 2026, now is a good time for plan sponsors to review their retirement plan practices and procedures and compliance calendars and implement safeguards to operationalize the automatic enrollment and automatic escalation safe harbor correction method. Plan sponsors should:

•  Adopt processes to review automatic enrollment and automatic escalation data for errors well in advance of the statutory deadline to correct such errors. The general deadline to correct is 9½ months after the end of the plan year in which the error first occurred. While the 9½-month correction window is critical, the internal deadline to review data from the prior year can be flexible and may vary based on the HR team’s needs.
• Consider establishing an earlier internal deadline to save on earnings for any corrective matching contributions and, in any event, make sure to remit corrective matching contributions, plus earnings, to the plan no later than the last day of the sixth month following the month in which correct elective deferrals begin.
• Adopt the processes described above even if you have not encountered automatic enrollment and automatic escalation errors in the past.  These types of errors are very common despite evolving technology.
• Ensure that HR team members are familiar with the steps they need to take when employees report irregularities with automatic enrollment and automatic escalation. When an employee raises a concern, the correction deadline accelerates to the end of the month after the affected employee notifies the employer of the error (but does not extend beyond 9½ months after the end of the plan year in which the error first occurred).
• Timely provide the required notice described above if you detect automatic enrollment or automatic escalation errors during your review, or a participant notifies you of such errors.
• Connect with your recordkeeper and payroll software vendor to identify ways to align reporting for automatic enrollment, automatic escalation, and automatic deferrals.
• Document your processes and maintain records of notices to ensure proof of compliance.

• Finally, if you have practices and procedures, ensure that the practices and procedures, whether formal or informal, are robust enough to support eligibility for self-correction.