American Journal of Trial Advocacy

Photo Credit: Rhame & Gorrell Wealth Management, What You Need To Know About The SECURE Act 2.0, https://rgwealth.com/insights/what-you-need-to-know-about-the-secure-act-2-0/

Authored by: Mary-Michael Rhodes

The SECURE Act.

In 2019, Congress passed the Setting Every Community Up for Retirement Enhancement Act (hereinafter the “Act”) as part of a spending and tax extension bill. The Act, commonly referred to as the SECURE Act, was aimed to do exactly what it was named for – allowing widespread ability for Americans to save for their retirement.[1] More specifically, the Act was enacted in the hopes of allowing easier ability to employers to offer tax advantageous retirement plans and making it easier for employees to participate in those plans.[2] The Act was enacted to address the increasingly low number of working individuals who had adequate retirement savings.[3] At the end of 2022, Congress passed the SECURE 2.0 Act[4] (hereinafter “SECURE 2.0”) which added numerous provisions to the Act.[5]

New Requirements Under SECURE 2.0.

Section 101 of SECURE 2.0 expanded automatic enrollment in retirement plans by amending the Internal Revenue Code (“Code”) to add section 414A.[6] Automatic enrollment is a common method by which employers may automatically deduct from an employee’s wages elective deferrals in order to allow for easy participation and increase employees’ retirement savings.[7] Under the provisions in section 414A, certain retirement plans are required to automatically enroll employees.[8] Participants in plans subject to the automatic enrollment requirement will now have to expressly opt out of participating rather than opting in.

Following the enactment of SECURE 2.0, a cash or deferred arrangement (“CODA”) will be treated as qualified CODAs, as defined by 401(k), or annuity contracts, as defined in 403(b), only if they meet the automatic enrollment requirements.[9] As such, SECURE 2.0 requires newly established 401(k) and 403(b) plans which do not meet an exception to include an automatic enrollment feature – an eligible automatic contribution arrangement (“EACA”).[10]

The Code defines an EACA as an employer retirement plan which allows a participant to elect for their employer to make contributions either directly to the plan or to the participant in cash equivalent to a uniform percentage of the employee’s compensation until the employee explicitly chooses otherwise.[11] EACAs must comply with the notice requirements prior to the start of the plan year in order to allow for the employee to opt out or elect to have the contributions made at a percentage other than the uniform percentage under the plan.[12] Pursuant to this requirement, the majority of employers who established either a 401(k) plan or a 403(b) plan on December 29, 2022, or later must include in their 2025 plans an EACA.[13]

In addition to the general requirements for EACAs, plans subject to SECURE 2.0 will be required to comply with certain additional requirements in order to properly be considered an EACA.[14] These requirements include the ability for employees to make permissible withdrawals,[15] the uniform percentage contributed is within a certain range,[16] and the amounts invested are done according to regulation.[17]

A. Permissible Withdrawals.

In order for an EACA to satisfy the permissible withdrawal requirement, the plan must allow for employees to make such withdrawals as defined by section 414(w)(2) of the Code.[18] The Code defines permissible withdrawals as any withdrawal from an EACA that is made as a result of an employee’s election to do so and such a withdrawal consists of funds that the employee elected to contribute to the plan equivalent to the plan’s uniform percentage.[19] Further, the employee must elect to make such a withdrawal no later than 90 days after the first automatic contribution made under the arrangement.[20] This date is recognized to be the date that the automatic contribution would have been included in the employee’s gross income otherwise.[21]  The amount that may be withdrawn is limited to the automatic contributions made under the arrangement.[22] If these requirements are satisfied, the employee can take out their initial automatic contributions without being penalized.

B. Uniform Percentage Contribution.

Under the SECURE 2.0 automatic enrollment requirements, plans must specify the percentage of an employee’s income to be deducted and automatically contributed to the retirement plan.[23] To comply with the uniform percentage contribution requirement of SECURE 2.0, the initial contribution percentage must be between three percent (3%) and ten percent (10%) for the first year in order for to have an EACA.[24] In order to not be subject to compliance with this requirement, the participant must either opt out or explicitly elect to make contributions at a different rate.[25] Further, the uniform contribution percentage must increase by one percent (1%) each plan year until it reaches ten percent (10%), but may not continue in such a manner once it reaches fifteen percent (15%).[26] This rate increase will not be required if the plan’s contribution percentage started at ten percent (10%) or the participant explicitly opts out of such an increase.[27] If any EACA is for a plan year which ended before January 1, 2025, the fifteen percent (15%) requirement will be replaced by a ten percent (10%) contribution percentage requirement.[28]

C. Investments.

Plans subject to SECURE 2.0 must ensure that the amounts which are automatically contributed are done so in accordance with the EACA, are invested properly, and are in compliance with 29 C.F.R. § 2550.40c-5, which is the default requirement that applies where the participant does not elect for the contribution to be invested in an alternative manner.[29] In the event that no election is made, the contributions that are automatically made under the plan will be considered to meet the investment requirements.[30]

Exceptions to SECURE 2.0.

There are exceptions to the automatic enrollment requirements under SECURE 2.0 for retirement plans established prior to the enactment of the statute, plans of small businesses, plans of new businesses, church plans, and governmental plans.[31] Section 414A of the Code specifically provides that the automatic enrollment requirements under SECURE 2.0 will not be applied to any simple plans;[32] any qualified CODAs or annuity contracts purchased under a plan established prior to December 29, 2022;[33] any governmental or church plans;[34] any qualified CODA or annuity contracts purchased under a plan maintained by an employer who has existed for less than three years;[35] or any qualified CODA or annuity contract purchased under a plan maintained by an employer with ten or less employees.[36]

Under this exception, a simple plan will not be subject to the automatic enrollment requirements under Section 414A(b) in order for the arrangement to be treated as a qualified CODA or an annuity contract.[37] To qualify as a simple plan, the plan must meet the contribution, exclusive plan, and vesting requirements specified in the section.[38] A simple plan subject to this exception must comply with the requirements under section 401(k)(11) of the Code.[39]

This exception provides for plans established prior to December 29, 2022, to receive “grandfather” status and therefore not be subject to the automatic enrollment requirements.[40] However, where a plan falls under an exception to the automatic enrollment requirements solely due to its date of establishment, this exception will not apply where an employer adopts such a plan after December 29, 2022, if it is maintained by multiple employers.[41] In the event of adoption of a multiple employer plan (“MEP”) after the enactment of SECURE 2.0, the plan will be subject to the automatic enrollment requirements of section 414A(a).[42]

Included in the exceptions to the automatic enrollment requirement, SECURE 2.0 provides for the exception of any church or governmental plans. A church plan is defined by the Code as a retirement plan that is established and maintained for employees of a church or a group of churches that is tax-exempt.[43] A plan will not be considered a church plan where it is established and maintained for the benefit of employees who are otherwise employed by unrelated businesses or where less than substantially all of the employees do not meet the employee requirements provided in section 414(e).[44] A governmental plan is defined by the Code as any plan which is established and maintained by the government or any agency of the United States for its employees.[45] Where the plan meets the requirements to constitute a church plan or governmental plan, it will not be subject to the automatic enrollment requirements of SECURE 2.0.[46]

The final subset of plans subject to exception from the automatic enrollment requirements of SECURE 2.0 consists of new and small businesses.[47] Pursuant to this exception, any qualified CODA or annuity contract under a plan that has been in existence for under three years will not be subject to the automatic enrollment requirements.[48] Further, any qualified CODA or annuity contract under a plan that is maintained by an employer who has ten or fewer employees.[49] As with the simple plan exception, there is a caveat to the new and small business exception. Where the plan is maintained by multiple employers, the small business exception requirements will be applied independently from the new business exception requirements to each employer.[50] In the event that one employer is subject to the automatic enrollment requirements, they will be considered to maintain a separate plan in regard to this small and new business exception.[51]

Conclusion.

Beginning on January 1, 2025, any plans that are not subject to one of the exceptions under SECURE 2.0 will be required to comply with the additional requirements for automatic contribution to employer retirement plans.[52] Any employer that maintains a retirement plan that is subject to this statute must comply with these requirements going forward in order to avoid costly penalties.[53] As such, it is important for employers to understand what action is necessary under these newly enacted requirements. Given the overall simplicity of the statute when broken down, compliance should come easily and

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[1] Christopher Sonzogni, SECURE Act: What It Means, How It Works, and Rationale, Investopedia (Feb. 1, 2025), https://www.investopedia.com/secure-act-4688468#:~:text=The%20SECURE%20Act%20was%20designed,annuities%20through%20xed%20retirement%20plans..

[2] Sonzogni, supra note 1.

[3] Sonzogni, supra note 1 (“A 2018 study by Northwestern Mutual found that one in five Americans have no retirement savings at all, while one in three of those closest to retirement age has less than $25,000 saved.”).

[4] See generally SECURE 2.0 Act of 2022 (2022).

[5] U.S. S. Comm. on Fin., https://www.finance.senate.gov/download/retirement-section-by-section-;Sonzogni, supra note 1.

[6] SECURE 2.0 Act of 2022 § 101 (2022); see also Tom Morgan, I.R.S. Notice 2024-2, https://www.irs.gov/pub/irs-drop/n-24-02.pdf.

[7] Eric Droblyen, SECURE 2.0’s Automatic Enrollment Mandate for 401(k)(s) – What Employers Need to Know, Employee Fiduciary (Mar. 26, 2024), https://www.employeefiduciary.com/blog/secure-2.0-automatic-enrollment.

[8] See generally 26 U.S.C. § 414A; see also Automatic Enrollment Requirements Under Section 414A, 90 Fed. Reg. 3092, 3092 (proposed Jan. 10, 2025).

[9] I.R.C. § 414A(a).

[10] I.R.C. § 414A(b)(1); Rachel Fetters, Mandatory Automatic Enrollment Under SECURE 2.0, Ascensus (Oct. 17, 2024), https://thelink.ascensus.com/articles/2024/10/16/mandatory-automatic-enrollment-under-secure-20.

[11] I.R.C. § 414(w)(3).

[12] I.R.C. § 414(w)(4).

[13] Fetters, supra note 5.

[14] I.R.C. § 414A(b)(1).

[15] I.R.C. § 414A(b)(2).

[16] I.R.C. § 414A(b)(3).

[17] I.R.C. § 414A(b)(4).

[18] I.R.C. § 414A(b)(2).

[19] I.R.C. § 414(w)(2)(A).

[20] I.R.C. § 414(w)(2)(B).

[21] Automatic Contribution Arrangements, 74 Fed. Reg. 8200, 8205 (Feb. 24, 2009).

[22] I.R.C. § 414(w)(2)(C).

[23] Droblyen, supra note 8.

[24] I.R.C. § 414A(b)(3)(A)(i).

[25] I.R.C. § 414A(b)(3)(A)(i).

[26] I.R.C. § 414A(b)(3)(A)(ii); U.S. S. Comm. on Fin., supra note 5.

[27] I.R.C. § 414A(b)(3)(A)(ii).

[28] I.R.C. § 414A(b)(3)(B).

[29] I.R.C. § 414A(b)(4).

[30] Id.

[31] U.S. S. Comm. on Fin., supra note 5.

[32] I.R.C. § 414A(c)(1).

[33] I.R.C. § 414A(c)(2)(A)(i)-(ii).

[34] I.R.C. § 414A(c)(3).

[35] I.R.C. § 414A(c)(4)(A).

[36] I.R.C. § 414A(c)(4)(B).

[37] I.R.C. § 414A(c)(1); I.R.C. § 414A(a).

[38] I.R.C. § 401(k)(11)(A).

[39] I.R.C. § 414A(c)(1).

[40] I.R.C. § 414A(c)(2)(A).

[41] I.R.C. § 414A(c)(2)(B).

[42] Id.

[43] I.R.C. § 414(e)(1).

[44] I.R.C. § 414(e)(2).

[45] I.R.C. § 414(d).

[46] I.R.C. § 414A(c)(3).

[47] I.R.C. § 414A(c)(4).

[48] I.R.C. § 414A(c)(4)(A).

[49] I.R.C. § 414A(c)(4)(B).

[50] I.R.C. § 414A(c)(4)(C).

[51] Id.

[52] I.R.C. § 414A(b).

[53] Droblyen, supra note 7.