The SECURE Act 2.0, signed in December of 2022, made numerous changes to retirement plans. Perhaps the most far-reaching changes are the new automatic contribution requirements. Most 401(k) plans that were established on or after December 29, 2022 are required to add automatic enrollment and automatic escalation no later than January 1, 2025. We’re collectively calling these new requirements that go into effect in 2025 mandatory automatic provisions (or “MAP”s).

The mandatory automatic provisions (MAPs) include both automatic enrollment and automatic escalation provisions with minimum requirements related to the default deferral rate, the automatic escalation rate, and the automatic escalation cap.

A default deferral rate is a set percentage of the employee’s compensation that is withheld from each payroll that will be contributed to their 401(k) account if the employee does not make their own election (or opt out) by the deadline in their onboarding invitation. For plans subject to the MAPs, the default deferral rate must be at least 3% but no more than 10% of compensation.

In addition to automatic enrollment, participants who are automatically enrolled generally must also be subject to automatic escalation. The two main parts of automatic escalation that are covered by the MAP rules are the automatic escalation rate and the automatic escalation cap. The automatic escalation rate is how much the participant’s deferral rate will increase each year and the automatic escalation cap is when the rate will stop increasing. For plans subject to the MAP the rate must increase at least 1% per year with a cap of no less than 10% but no more than 15%. You can find out more on how automatic escalation works here.

The basic/lowest MAP set-up would be a default deferral rate of 3% that would increase each year by 1% until the participant's default deferral rate is 10%. But there is some flexibility. For example, plans that do not want automatic escalation could set their initial default deferral rate at 10%. Since all automatically enrolled participants would already be at the minimum automatic escalation cap, they would not be required to include an additional automatic escalation provision.

Additionally, plans subject to the MAP must allow participants to request a refund of their automatically deferred amounts, sometimes referred to as EACA permissible withdrawals, if the request is made within 90 days of the first automatic contribution. This means that plans subject to the MAPs must include EACA or QACA provisions since ACA plans cannot allow for permissible withdrawals.

There are three exemptions to the MAP requirements (1) small businesses; (2) new businesses; and (3) governmental, church, or SIMPLE plans.

Small businesses, for the purposes of this exemption, are defined as “normally” employing 10 or fewer individuals. Unfortunately, we are still awaiting further guidance from the IRS on how to define or determine this limit and if any classes of employees are excluded. It is clear however that the limit measures employees generally and does not exclude employees who have not met the eligibility requirements to participate in the plan. In general, once a plan sponsor stops meeting the requirements for this exemption they need to add the MAPs no later than the start of the next taxable year. Since plans subject to the MAPs must add an EACA or QACA provision and those can only be added at the beginning of the plan year, care must be taken for plans where their tax year end and plan year end do not match to ensure they can add the required provisions timely.

A new business, for the purposes of this exemption, is one that has been in business for fewer than three years. The IRS has not provided timing guidance for this exemption but it seems likely that the MAP requirements must be met by the beginning of the company’s fourth taxable year. Since plans subject to the MAPs must add an EACA or QACA provision and those can only be added at the beginning of the plan year, care must be taken for plans where their tax year end and plan year end do not match to ensure they can add the required provisions timely.

Plans sponsored by churches and governmental organizations are exempt from the MAP requirements regardless of when they were established or the number of employees. Similarly, SIMPLE IRAs and SIMPLE 401(k)s are always exempt from the MAP requirements.

Yes, there is no exception in the law or regulations for Starter 401(k) or plans with QACA provisions even though the existing QACA rules allow for lower automatic escalation caps.
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