This article is the third in the series addressing the 81 pages of guidance on the legislation known as SECURE 2.0 (the Act) enacted on December 29, 2022, issued by the IRS on December 20, 2023 as Notice 2024-02 (Notice). The first article addressed the extension of the deadline for written amendments and de minimis financial incentives to enroll in a 401(k) or 403(b) plan. See Notice 2024-02 Extends Deadline For SECURE 2.0 Amendments And Provides Other Guidance. The second article discussed Roth employer nonelective and matching contributions. See Guidance on Roth Nonelective or Matching Contributions in IRS Notice 2024-02. This article will address guidance on the Act’s requirement that any 401(k) plan or 403(b) plan (collectively, Plans) established on or after December 31, 2024, must provide automatic enrollment. However, Plans that are established prior to the date of enactment of the Act, December 29, 2022, are exempt from such requirement (Grandfathered Plans). The Notice discusses when a Plan is established in order to be a Grandfathered Plan. It also discusses how the new requirements affect mergers and acquisitions, multiple employer Plans, spun off Plans and the new deferral only Plans created by the Act. These are addressed below.

Establishment of a Plan. Under the Notice, a 401(k) plan is established on the date plan terms providing for the cash or deferred arrangement are initially adopted. It is important to note, that it is the adoption date and not the effective date that governs. The Notice provides an example where a 401(k) plan is adopted on October 3, 2022, but not effective until January 1, 2023. The Notice concludes that the 401(k) plan is a Grandfathered Plan because it was established prior to December 29, 2022, even though not effective until afterward.

A 403(b) plan is a Grandfathered Plan if the Plan was established prior to December 29, 2022, regardless of whether it provided for salary reduction contributions when initially adopted. Presumably this means that if the 403(b) plan were adopted January 1, 2022, and only provided for employer contributions, it could be amended in 2025 to permit salary reduction contributions and still be exempt from the automatic enrollment requirement.

Mergers and Acquisitions. If two Grandfathered Plans of single employers are merged, the surviving Plan remains grandfathered. Likewise, if a single employer Grandfathered Plan merges with a multiple employer Grandfathered Plan, the surviving Plan remains a Grandfathered Plan. However, if a single employer Plan that is not a Grandfathered Plan is merged into a multiple employer Plan that is a Grandfathered Plan, then the single employer Plan that merged would not be considered a Grandfathered Plan but the remaining employers in the grandfathered multiple employer Plan remain grandfathered.

If a single employer Plan that is not a Grandfathered Plan is merged into a single employer Plan that is a Grandfathered Plan, the Grandfathered Plan will generally lose its Grandfathered Plan status unless, the transaction uses the Code section 410(b)(6)(C) transition relief for meeting coverage. In that case, the ongoing Plan will continue to be considered a Grandfathered Plan, provided the merger occurs by the end of the Code section 410(b)(6)(C) transition period.

Spun Off Plans. The Notice provides that, generally, if a new Plan is spun off from a single employer Grandfathered Plan, the spun off Plan will be considered a Grandfathered Plan. However, if the Plan was spun off from a multiple employer Grandfathered Plan, then the spun off Plan will only be considered a Grandfathered Plan if it were so considered while part of the multiple employer Plan.

Deferral Only Plans. SECURE 2.0 created two new types of deferral only Plans beginning after December 31, 2023. These are the starter 401(k) deferral-only arrangement and the safe harbor deferral-only 403(b) plan. These plans allow employers who do not otherwise offer a retirement plan to permit employees to make elective deferrals only. The Notice provides that the automatic enrollment rules will generally apply to such plans for plan years beginning after December 31, 2024, unless another exception applies. There are exceptions from the automatic enrollment rules for small employers with less than 11 employees and new plans that have been in existence for fewer than 3 years.

Stay tuned for future articles on more guidance under the Notice such as correcting autoenrollment failures, distributions for the terminally ill, and the increased tax credit for adopting plans.