The Department of Treasury and the Internal Revenue Service (IRS) on Friday issued a series of last-minute proposed regulations addressing select SECURE 2.0 provisions, including those on catch-up contributions and automatic enrollment.
The first set of proposals by the agencies concerns Roth catch-up contributions. Under Section 603 of SECURE 2.0, participants with a salary of or over $145,000 must make catch-up contributions to a qualified retirement plan on a Roth basis. However, the new proposal by the Treasury Department and the IRS would no longer allow employers to require that participants make these contributions in order to streamline plan administration.
Plan participants who earn $145,000 or less must still be allowed to make traditional catch-up contributions.
Plan sponsors, along with other members of the defined contribution retirement plan industry, had previously raised cost concerns about implementing the new provisions while coordinating with payroll administrators, recordkeepers, and other service providers. As a result, the IRS had provided a two-year administration transition period to make room for logistical hurdles.
The proposed regulations also include provisions on automatic enrollment in multiple employer plans (MEPs) and pooled employer plans (PEPs), along with traditional 401(k) and 403(b) workplace plans.
Under the new proposals, the Treasury Department and the IRS say that if a “pre-enacted” plan—meaning a plan created before SECURE 2.0—were to join a MEP or PEP formed after the law was passed, then the plan could keep its pre-enactment status. These plans would still be able to join MEPs or PEPs but would not be required to offer automatic enrollment to participants.
The proposal is a reversal of what some in the industry initially believed was the IRS’ stance. However, the IRS said it reversed its guidance following comments requesting the change.
“The comments requested guidance providing that if a pre-enactment plan is merged into a [MEP], then the merged-in plan does not lose its pre-enactment status with respect to the employer that maintained the merged-in plan regardless of whether the [MEP] was established before or after December 29, 2022,” the proposal states. “In response to these comments, the proposed regulation would provide that, if an employer maintains a pre-enactment plan that is merged into a [MEP] after December 29, 2022, then the post-merger multiple employer plan will be treated as a pre-enactment plan with respect to that employer. This rule would apply regardless of the date of establishment of the multiple employer plan.”
Regarding 401(k) and 403(b) plans, the proposed regulations provide guidance to plan administrators for properly implementing SECURE 2.0 provisions. Under the law, for plans established after SECURE 2.0 was passed, plans must automatically enroll employees at an initial contribution rate of at least 3% with automatic increases each year until 10%.
According to the Treasury Department and IRS, this law will apply to plan years that begin more than six months after the date the final regulations were issued. Before the final regulations are applicable, plan administrators must apply a reasonable, good faith interpretation of the statute.
The proposed changes came as a surprise to the retirement industry, as SECURE 2.0 provisions regarding catch-up contributions and automatic enrollment already took effect on Jan 1.
Further guidance on both provisions will be published in the Federal Register on Jan. 13 and 14. A public hearing on the proposed regulations has been scheduled for April 7 at 10 a.m. ET. Requests to speak and outlines of topics to be discussed at the public hearing must be received within 60 days after the proposals are published in the Federal Register.
SEE ALSO:
SECURE 2.0 Roth Catch-Up Delay: More IRS Guidance to Come
Glitch-Fixing: How 2024 Catch-Up Contributions Could Be Restored in SECURE 2.0