The President signed the Consolidated Appropriations Act, which included SECURE Act 2.0, on December 29, 2022—the “enactment date”.

SECURE Act 2.0 has over 90 provisions, some major and some minor. One of the most impactful provisions is the new requirement to automatically enroll and automatically increase deferrals to new 401(k) and 403(b) plans.

New 401(k)s and 403(b)s must be automatically enrolled and the deferrals automatically increased, beginning for plan years after December 31, 2024. At that time, 401(k) and 403(b) plans will be required to automatically enroll eligible employees at 3% (but not more than 10%) and thereafter automatically increase the deferral rates by 1% per year up to at least 10% (and if desired by the employer, up to a maximum of 15%). Defaulting participants must be invested in a QDIA (qualified default investment alternative).

But there’s more to the requirement than first appears.

401(k) and 403(b) plans established before the enactment date (December 29, 2022) won’t have to be automatically enrolled and escalated. But plans “established” on or after the enactment date should either begin as “auto” plans or they will have to be converted to be automatic in 2025.

Advisors and consultants need to let employers who are considering setting up new plans know about the change, or 2025 could be a shock to those employers.

There are exceptions:

• Government and church plans.
• New businesses: The requirement will not apply to an employer that has been in existence for less than 3 years.
• Small businesses: The requirement will not apply until one year after the taxable year in which an employer has more than 10 employees.
• SIMPLE 401(k) plans.
• MEPs and PEPs: The auto requirement does not apply to a MEP or PEP as a whole; however, the requirement does apply to employers who adopt a MEP or PEP as if they were adopting a single employer plan on or after the enactment date.

Concluding Thoughts

With this change, it is only a matter of time until “automatic plans” are considered the norm. For the moment, however, this is a significant change, particularly for plans of small employers.

Any plan established on or after the enactment date—December 31, 2022—will ultimately need to be converted to an automatic plan under these new rules. Employers who are setting up plans should consider whether it is preferable to start as an automatic plan or to wait until 2025 to make the change. Advisors, consultants, recordkeepers and administrators will be at the forefront of educating employers about these changes and the considerations for making the necessary decisions.