401(k) plan administrators can use this article to learn what the mandatory automatic provisions are under the SECURE 2.0 Act, whether they apply to your plan, and what exemptions may be available.
The SECURE 2.0 Act, signed in December 2022, made significant changes to retirement plans. Among the most far-reaching are new automatic contribution requirements — collectively called the mandatory automatic provisions (MAPs).
Most 401(k) plans established on or after December 29, 2022, were required to add automatic enrollment and automatic escalation no later than January 1, 2025.
MAPs include both automatic enrollment and automatic escalation, each with specific minimum requirements.
A default deferral rate is the percentage of an employee’s compensation automatically contributed to their 401(k) if they do not make their own election — or opt out — by the deadline in their enrollment invitation.
For plans subject to MAPs, the default deferral rate must be:
At least 3% of compensation
No more than 10% of compensation
Employees who are automatically enrolled must generally also be subject to automatic escalation — an annual increase to their default deferral rate until a set cap is reached.
For plans subject to MAPs:
The default deferral rate must increase by at least 1% per year
The escalation cap must be no less than 10% and no more than 15%
Note: The minimum MAP setup is a 3% default deferral rate that increases by 1% each year until reaching 10%. Plans that prefer not to include escalation can set their initial default rate at 10% — since all automatically enrolled participants would already be at the escalation cap, no additional escalation provision is required.
Plans subject to MAPs must allow participants to request a refund of automatically deferred contributions — sometimes called a permissible withdrawal — if the request is made within 90 days of the first automatic contribution.
This means plans subject to MAPs must include an eligible automatic contribution arrangement (EACA) or qualified automatic contribution arrangement (QACA) provision. Basic automatic contribution arrangements (ACAs) do not allow for permissible withdrawals and cannot satisfy this requirement.
Plans established before December 29, 2022 are exempt from the MAP requirements. IRS Notice 2024-2 and the related proposed regulations define “established” as the date the plan document was signed. This exemption is currently permanent.
If two plans that are both exempt from the MAP requirements due to the date they were established merge, the resulting plan will be exempt and will be deemed to have been established before December 29, 2022.
If one plan that is exempt due to its establishment date merges with a plan established on or after December 29, 2022, the resulting plan will generally be treated as if it was established after December 29, 2022. The exempt plan must be designated as the ongoing plan to retain its exempt status. If your plans are in this category, we recommend working with an ERISA professional to determine whether the resulting plan is exempt from the MAP requirements.
If a plan spins off from a plan that is exempt due to its establishment date, the spun-off plan will be treated as exempt for the same reason.
If an employer joins a multiple employer plan (MEP) or pooled employer plan (PEP) that was established on or after December 29, 2022, the joining employer will still need to meet the MAP requirements unless it qualifies for another exemption.
New companies are also exempt from the MAP requirements. For this exemption, a new business is one that has been in business for fewer than three years. The definition of business includes predecessor businesses and legally related businesses.
IRS rules require employers to implement MAP-compliant provisions by the start of the first plan year on or after the company’s third anniversary, per timing guidance the IRS provided in its proposed regulations. Since plans subject to MAPs must add an EACA or QACA provision — and those can only be added at the start of the plan year — pay close attention if your tax year end and plan year end (always December 31 for plans with Gusto Retirement) do not match, so you can add the required provisions on time.
For this exemption, small companies are defined as those “normally” employing 10 or fewer individuals. In its proposed regulations, the IRS stated that this determination will be based on the guidance in Q&A 5 of Treas. Reg. section 54.4980B-2 (used to determine a small employer plan for COBRA purposes). Generally, all employees — whether or not they’re eligible for the plan — are included in the count, except for self-employed individuals, independent contractors, and non-employee directors. Part-time employees may count as a fractional employee. These rules are complex, so work with your tax advisor to confirm whether you meet the requirements for this exemption.
Important: Employers must implement MAP-compliant provisions by the start of the first plan year after the first year they no longer meet the exemption. Since plans subject to MAPs must add an EACA or QACA provision — and those can only be added at the start of the plan year — pay close attention if your tax year end and plan year end (always December 31 for plans with Gusto Retirement) do not match, so you can add the required provisions on time.
Plans sponsored by churches and governmental organizations are exempt from the MAP requirements regardless of when they were established or how many employees they have. Governmental plans should not establish new 401(k) plans, since governments have not been eligible to establish a 401(k) plan since 1986.
SIMPLE IRAs and SIMPLE 401(k)s are always exempt from the MAP requirements.
If one of these exemptions applies to you, let Gusto Retirement know. If you’re claiming an exemption based on your business’s size or age, you must notify Gusto Retirement as soon as you no longer meet the exemption so we can timely amend your plan to include the required provisions.
Starter 401(k) plans and plans with QACA provisions are not exempt from MAP requirements. There is no exception in the law or regulations for either plan type — even though existing QACA rules permit lower automatic escalation caps than the MAP minimums require.
This information is general in nature and is for informational purposes only. It should not be used as a substitute for specific tax, legal and/or financial advice that considers all relevant facts and circumstances. You are advised to consult a qualified financial adviser or tax professional before relying on the information provided herein.