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A recent call with a financial advisor in California is representative of a common question about the automatic enrollment mandate.
Welcome to the Retirement Learning Center’s (RLC’s) Case of the Week. Our ERISA consultants regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans, and other types of retirement savings and income plans, including nonqualified plans, stock options, Social Security, and Medicare. This is where we highlight the most relevant topics affecting your business.
“Due to an administrative oversight, one of my clients failed to implement the automatic enrollment requirement for their 401(k) plan when they should have; what should they do?”
The plan sponsor must take corrective steps. Which steps depend on timing.
In general, new 401(k) and 403(b) plans established on or after December 29, 2022, are required to implement automatic enrollment not later than the first plan year beginning after December 31, 2024. For a calendar-year plan, this would have been January 1, 2025. If an employer is not exempt from these rules and misses the deadline, the plan sponsor can still self-correct without an IRS filing. Here are the steps.
Correct the plan’s operation to apply the required automatic enrollment provision and ensure that the plan document is timely amended to reflect that the provision retroactively applies as of the effective date. (Generally, nongovernmental, non-collectively bargained qualified plans and 403(b) plans have until December 31, 2026, to adopt SECURE 2.0-conforming amendments, provided they have operated consistently with the statutory requirements.)
If the plan has a match, a corrective contribution equal to 100% of the missed match, adjusted for earnings, is required within a reasonable period. It is deemed timely if made by the last day of the sixth month following the month in which correct deferrals begin (or would have begun for a terminated participant).
There may be a qualified nonelective contribution (QNEC) needed for the missed deferral opportunity depending on when the correction is made.
IRC Sec. 414(cc) and Notice 2024-2 provide for a 0% QNEC safe harbor correction for active or terminated participants if:
Correct deferrals begin by the earlier of the first payroll on or after 9½ months after the end of the year the failure occurred, or if the participant notifies the plan sponsor of the error, the first payroll on or after the end of the following month, and
Participants are notified within 45 days after the correct deferrals start. (For a terminated participant, the deadline is based on when correct deferrals would have begun but for the termination.)
If the §414(cc) 0% QNEC safe harbor is no longer available, other correction methods under the Employee Plan Compliance Resolution System (EPCRS) may apply.
25% QNEC for participants who are still active at the time of the correction and:
Correct deferrals begin not later than the earlier of the first payroll on or after the last day of the third plan year following the plan year in which the failure occurred, or, if the participant notifies the plan sponsor of the error, the first payroll on or after the end of the following month, and
Participants are notified within 45 days after the correct deferrals start.
If neither the 0% nor 25% reduced-QNEC safe harbor applies, the EPCRS correction method generally requires a QNEC equal to 50% of the participant’s missed deferral opportunity, together with any missed matching contribution and applicable earnings.
Example 0% QNEC: A calendar-year 401(k) plan established in 2023 was required to begin automatic enrollment on January 1, 2025, but the sponsor failed to implement the plan’s 3% automatic deferral because of an administrative error. The plan matches 100% of the first 3% deferred. The employee received $100,000 in compensation during the entire period for which the 3% automatic deferral and related match were missed.
If the employer begins correct deferrals with the first payroll on or after October 15, 2026, and provides the required notice within 45 days, the correction for an employee with $100,000 of compensation would be:
No QNEC for the missed deferral opportunity.
A corrective match of $3,000, plus earnings.
Key Takeaway: Correcting within the special safe-harbor deadline can eliminate the QNEC for missed deferrals, but any missed employer match still must be made, along with earnings.
Affected plan sponsors should act quickly to ensure they follow SECURE Act 2.0 auto-enrollment requirements. If missed deferrals occur, correcting within the 9½-month deadline—unless participant notification requires earlier correction—avoids a QNEC altogether. Missing that safe harbor may require the sponsor to use the more costly EPCRS 25/50% corrections.