IRS Guidance on Secure Act Auto-Enrollment and Safe Harbor Plan Changes

On December 9, 2020, the Internal Revenue Service (“IRS”) issued question-and-answer guidance (Notice 2020-86) regarding certain changes to safe harbor 401(k) plans and auto-enrollment arrangements made by the Setting Every Community Up for Retirement Enhancement (“SECURE”) Act. These changes include (i) an increase in the maximum permissible automatically adjusted elective deferral rate for auto-enrollment safe harbor 401(k) plans from 10 percent to 15 percent; (ii) the elimination of annual safe harbor notice requirements for many safe harbor plans; and (iii) changes regarding the retroactive adoption of safe harbor status for some 401(k) plans. A brief description of the new guidance is posted on the IRS website.

Background. On December 20, 2019, President Trump signed the SECURE Act into law (see our previous blog Congress Finally Passes Secure Act – The Most Sweeping Pension Legislation in Over a Decade is Now Law for a general overview). Hailed as the most far-reaching pension legislation in over a decade, the SECURE Act contains a myriad of provisions designed to increase access to 401(k) plans, boost retirement savings, and simplify plan administration. Among its many provisions were changes to both 401(k) auto-enrollment arrangements and safe harbor 401(k) plans generally.

What is Auto-Enrollment? Many 401(k) plans take advantage of a design feature known as an “automatic contribution arrangement,” or “auto-enrollment” for short. Under the Internal Revenue Code, there is more than one type of auto-enrollment feature, including, for example, “qualified automatic contribution arrangements (“QACAs”). Generally stated, auto-enrollment features provide that newly eligible participants become automatically enrolled in the 401(k) plan, unless they affirmatively opt-out of such enrollment within a specified time period. The plan must specify the initial elective deferral rate, along with the default investment fund vehicle, for participants who do not decide either of these on their own. In many plans, absent affirmative action by the participant, the elective deferral rate automatically increases over time. Among other legal conditions, auto-enrollment plans are subject to special annual notice requirements.

What Are Safe Harbor Plans? Safe harbor plans are similar to traditional 401(k) plans, but are structured in a way that some of the annual nondiscrimination tests can be avoided. The chief legal requirement for a safe harbor plan is that mandatory, set-rate, 100 percent vested employer contributions (either matching or nondiscretionary) must be made each year on behalf of all eligible, nonhighly compensated employees. Prior to the SECURE Act, all safe harbor plans also had to provide participants and beneficiaries, within strict timeframes, with an annual notice describing the plan and its contributions.

SECURE Act Auto-Enrollment and Safe Harbor Plan Changes. The SECURE Act made certain changes to the rules regarding auto-enrollment features that are offered as part of safe harbor 401(k) plans. Generally stated, the new law increased the maximum permissible automatic elective deferral percentage under an automatic enrollment safe harbor plan from 10 percent of a participant’s compensation to 15 percent of compensation.

The Act also eliminated the annual notice requirement for 401(k) plans that use nonelective contributions (as opposed to matching contributions) to satisfy the safe harbor contribution requirements, and added a new provision allowing for the retroactive adoption of safe harbor status for those plans.

Highlights of Notice 2020-86. Notice 2020-86 is intended to provide initial guidance on particular issues, while the IRS works with the U.S. Treasury Department to develop formal regulations to fully implement the pertinent sections of the SECURE Act. Some of the more noteworthy provisions are listed below:

NOTE: Much of Notice 2020-86 is rather technical in nature. This article is intended as a general overview of the more prominent provisions and is not intended to thoroughly exhaust every detail contained in Notice 2020-86.

Highlights of Provisions Relating to Increase in Maximum Automatic Elective Deferral from 10 Percent to 15 Percent:

• A safe harbor 401(k) plan utilizing a QACA is not required to increase the maximum qualified percentage of compensation in order to maintain its status as a QACA.

OBSERVATION: In other words, the increased maximum default deferral rate of 15 percent is permissive, so long as the percentage of compensation chosen by the plan is applied uniformly, does not exceed the stated maximum percentage, or fall below the required minimum percentage.

• If a plan incorporates the maximum allowable deferral percentage by reference, the plan will not fail to operate in accordance with its terms merely because the plan continues to apply the maximum qualified percentage of 10 percent as in effect before the SECURE Act amendments.
• However, plans that incorporate the maximum allowable deferral percentage by reference may need to be amended to clarify which maximum rate applies for a given time period (eg., to provide that the plan’s maximum qualified percentage is 10% retroactive to the first day of the first plan year beginning after December 31, 2019).

Highlights of Provisions Relating to Elimination of Annual Safe Harbor Notice Requirement:

• The annual safe harbor notice requirements continue to apply to a 401(k) plan that uses employer matching contributions to satisfy the safe harbor requirements, even if the plan also has nonelective contributions that would, by themselves, satisfy the nonelective safe harbor.

EXAMPLE: So, if a traditional safe harbor 401(k) plan makes nonelective contributions that would satisfy the nonelective safe harbor requirements, but also provides matching contributions that are structured so that the plan is not required to satisfy the actual contribution percentage (ACP) test, then the plan still must supply the annual safe harbor notice (because it is, technically, a “401(m) safe harbor” plan).

• Except for the annual notice requirement, the SECURE Act does not change any other requirements that may apply to a plan that satisfies the safe harbor nonelective contribution requirements.

Highlights of Provisions Relating to Retroactive Adoption of Safe Harbor Status:

• Generally stated, the SECURE Act retroactive plan amendment provisions are not conditioned on whether a prior plan amendment reduced or suspended safe harbor nonelective contributions during the plan year.
• Effective for plan years beginning after Dec. 31, 2019, the mid-year plan amendment provisions contained in the SECURE Act supersede the retroactive plan amendment rules that were previously published in the regulations, which no longer apply to such plans.

Effective Date. The SECURE Act provisions relating to changes in the rules regarding auto-enrolment in safe harbor plans are effective for plan years beginning after December 31, 2019. Unlike proposed or final regulations, there is no specific effective date that applies to the question and answer guidance in Notice 2020-86. (This is most likely because the guidance is expected to be incorporated into regulations at a later date, following receipt of comments from the public (see below).)

Comments Are Welcome. The U.S. Treasury Department and the IRS invite comments on Notice 2020-86 and any other aspect of the relevant portions of the SECURE Act. Comments should be submitted in writing on or before Feb. 8, 2021, must include a specific reference to Notice 2020-86, and may be submitted in one of two ways:

• Electronically (strongly encouraged) via the federal eRulemaking portal (type IRS-2020-0045 in the search field on the regulations.gov homepage to find this notice and submit comments).
• By mail to: Internal Revenue Service, Attn: CC:PA:LPD:PR (Notice 2020-86), Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, D.C. 20044.

The information and content contained in this blog post are for general informational purposes only, and does not, and is not intended to, constitute legal advice. As always, for specific questions concerning your 401(k) retirement plan, or for help in operating your plan during the current COVID-19 crisis, please consult your own ERISA attorney or professional advisor.