Author | Bonnie Treichel
As we kick off the new year, Washington is bustling with activity before the change in administration. The Department of Labor (DOL) and the Internal Revenue Service (IRS) have just released proposed regulations, sub-regulatory guidance, and other updates for which plan fiduciaries should be aware. These developments address outstanding questions about a few key SECURE 2.0 provisions, correction mechanisms, and the handling of missing participants.
Here’s What You Really Need to Know:
- The DOL issued proposed regulations addressing SECURE 2.0 provisions, including Roth catch-up contributions (section 603) and automatic enrollment for new plans (section 101).
- The DOL released an update to their Voluntary Fiduciary Correction Program (VFCP), which has been pending since 2022. This update makes plan administration easier for plan sponsors.
- An enforcement relief policy was introduced by the DOL in Field Assistance Bulletin No. 2025-01 which will assist plan fiduciaries in managing small balances owed to missing participants.
Let’s Dive In…
SECURE 2.0 Guidance
SECURE 2.0 passed over two years ago, and it provided a framework for many of its 90+ provisions, but that framework required technical guidance from regulators for implementation to be effective. On January 10, 2025, the IRS issued proposed regulations for two provisions of SECURE 2.0 (sections 101 and 603) which will allow plan fiduciaries to understand the technical aspects required for implementation of these provisions.
Automatic Enrollment: Section 101 mandates that new 401(k) and 403(b) plans must automatically enroll employees at a rate between 3% and 10%, with an annual increase of 1% until reaching 10% to 15%. Exceptions apply for small businesses and certain circumstances.
This provision took effect on January 1, 2025, and the proposed regulations clarify the treatment of existing employees. Initial guidance was issued by the IRS in the form of the “grab bag” under Notice 2024-2. The proposed regulations incorporate the prior guidance but will not be effective until the first plan year beginning six months after the IRS issues final regulations. The regulations propose that all employees in the plan who are eligible to elect to have contributions made to the plan are subject to automatic enrollment. This means the newly eligible long-term part-time employees will need to be auto-enrolled unless, of course, they take action to opt out. It also means that the auto-enroll should apply to existing employees (unless the participant has an affirmative election otherwise), not just employees who were hired after the provision took effect.
The guidance also confirms that plans that were established prior to December 29, 2022, but later join a multiple employer plan (MEP) or pooled employer plan (PEP) are not subject to the auto-enroll mandate. These plans will be considered on a plan-by-plan basis.
Roth Catch-up: For plan sponsors who were hopeful that the Roth catch-up provision would be delayed beyond 2026, it is time to prepare for compliance. Section 603 of SECURE 2.0 added a mandatory Roth catch-up contribution requirement for higher-income plan participants. Under Notice 2023-62, the implementation date was pushed to January 1, 2026, because of the difficulty in administering this provision.
For the mandatory Roth catch-up provision (section 603), the IRS issued a proposed regulation that clarifies that plans are not required to include a Roth contribution option in the plan. However, if a plan does not allow for Roth contributions, participants who are subject to the mandatory Roth catch-up will not be able to make catch-up contributions. It also notes that employees who are not subject to the mandatory Roth catch-up (because of their income) should still have the option to designate their catch-up contributions as Roth.
The IRS is allowing comments on the proposals which could result in revisions to the proposed regulations. Additionally, a public hearing is scheduled to be held in April 2025 to address questions and concerns about the impact the proposed regulations may have. The proposed regulations will be effective six months after the final regulations are published. During this time, plan sponsors should prepare for compliance and coordinate with their service providers, including payroll providers, to work on compliance for this provision.
Finally, the Final Rule for VFCP changes
The DOL has released its final rule on changes to the VFCP. The VFCP program was established in 2002 to allow plan sponsors to self-correct certain errors and avoid potential penalties. The proposal to update the VFCP rules was issued in November 2022, so these changes have been long-awaited.
The final rules will make it easier and more useful for employers to manage self-corrections of errors. Key changes include the addition of two new self-correction features and clarifications to existing transactions eligible for correction. Plan sponsors can now self-correct:
- late transmission of participant loan repayments
- late transmission of contributions
Late contributions are one of the top plan errors, so the long-awaited final rules simplify the correction process and reduce the risk of compliance issues for many plan sponsors.
The amendment to the VFCP will be effective on March 17, 2025.
Missing Participants
Plan sponsors are likely familiar with the challenges of managing small retirement plan balances for missing participants. To address these challenges, the DOL announced an enforcement relief policy under Field Assistance Bulletin No. 2025-01. So long as a prudent process is followed, this policy will allow retirement plan fiduciaries to transfer small benefit amounts (up to $1,000) for missing participants to state unclaimed property funds without facing penalties. This policy aims to help fiduciaries manage small outstanding retirement benefit payments and reunite participants with their benefits. Historically, the DOL has allowed for small benefit amounts to be rolled over into an individual retirement account (IRA), which can present challenges and may in some cases result in fees. This was a key consideration in the DOL’s decision as unclaimed property funds generally do not deduct fees and make efforts to return the unclaimed property to individuals.
The DOL has emphasized the importance of returning unclaimed funds to individuals by introducing a requirement that requires plan sponsors to report missing participant balances to a newly established lost and found database, which was launched as a result of SECURE 2.0. The DOL is currently working to establish a searchable online database that will allow participants and beneficiaries of retirement plans to search for their contact information and make a claim for benefits.
Additional guidance will be forthcoming on missing participants, but until then, plan fiduciaries may rely on this guidance in conjunction with the prior guidance for missing participants from January 2021.
Action Items for Plan Sponsors
Plan Sponsors should consider the following steps to stay compliant and informed:
- Review plan documents to determine if Roth contributions are available within the plan. If they are not, a decision will need to be made to determine if the Roth contributions should be added to allow participants impacted by section 603 of SECURE 2.0 the option to contribute catch-up contributions.
- Consider participating in the public hearing or submitting comments to provide feedback on the proposed regulations for the SECURE 2.0 provisions.
- Understand which plan errors are allowed to be corrected under the VFCP program. Review internal processes and procedures for self-corrections to ensure compliance.
- Review the process that is in place for locating missing participants. Review and understand all conditions for the new relief policy before deciding to transfer small balances to the state’s unclaimed property fund.
- Keep an eye out for any additional guidance or clarifications from the IRS and DOL regarding pending regulations and additional guidance.
- Seek assistance from an advisor or legal representative if further clarification is needed.
