Although many plans had to implement MAE on January 1, 2025, the proposed regulations aren’t applicable until plan years starting more than six months after the final regulations are issued. For example, if the final regulations are issued on July 20, 2026, the regulations will first apply as of January 1, 2028, for calendar year plans. Until then, plans must follow a reasonable, good faith interpretation of the statutory provision in SECURE 2.0.

Observation—The delayed regulatory applicability date was welcome news, providing plan sponsors with more time to update operating systems and procedures to comply with the MAE regulations. Plan sponsors, however, should be aware that this doesn’t delay the statutory implementation date, but complying with a reasonable, good faith interpretation of the statute offers more flexibility for varied interpretations of the rules.

All employees eligible to make salary deferrals, including long-term, part-time (LTPT) employees, must be automatically enrolled, unless they’ve made an affirmative election to opt out. There are no exceptions to this rule.

Observation—Covering all eligible employees, including LTPT employees, will inevitably increase the number of participants with account balances. This could potentially lead to higher fees due to more complicated annual filings, audit requirements, and an increased volume of participant communications. In addition, it’s likely to result in small account balances, which will exacerbate the missing participant problem for both plan sponsors and the U.S. Department of Labor. Lastly, it may also lead to increased amounts of employer matching contributions. 

The proposed regulations offer relief for plans that were required to implement MAE for the 2025 plan year but were established before the implementation date. This relief applies to plans that initially enrolled only participants who became eligible after MAE implementation, not existing participants.

Plans have until the regulatory applicability date to apply the default contribution rate to participants who should’ve been automatically enrolled on January 1, 2025, as long as they haven’t opted out. At that point, participants must be enrolled at a rate that includes any missed annual increases since January 1, 2025, or at the initial default rate without those increases.

Observation—This relief was crucial because some retirement plan practitioners believed that employees who entered the plan before the MAE start date of January 1, 2025, were exempt from auto-enrollment, even if they hadn’t made an affirmative election. It’s especially helpful that plan sponsors have the flexibility to decide whether or not to apply the missed annual increases.

Participant default contribution rates must increase by 1% to at least 10% (but no more than 15%) for each plan year after their initial period. The initial period starts when the employee is first eligible to make salary deferrals under the plan (or, if later, when MAE first applies to the plan) and ends on the last day of the following plan year. Plans may, however, include a reset provision if an employee doesn’t have contributions under the MAE default rate for at least a full plan year.

For example, suppose a plan subject to MAE has a calendar plan year. If an employee leaves the company while at a 7% default rate (an initial default rate of 3% with four 1% annual increases) and is rehired after a full calendar year break, their rate can be reset to the initial 3% default rate at reentry; however, if the prior employee is rehired before incurring a full calendar year break, their default rate at rehire would be at least 7% as annual increases since the employee's initial participation must be considered.

Observation—Determining a rehired employee’s default contribution rate under MAE is extremely complicated. Several factors need to be analyzed, such as whether the plan includes a reset provision, whether participants were subject to the MAE default rate when they left the company, and whether participants had a full plan year break without being subject to the MAE default rate. This process becomes even more complex when plan sponsors change recordkeepers, as the necessary information may not be available or provided. We hope that the final regulations will offer a more streamlined approach for rehired employees to mitigate operational failures.  

• Plans maintained by businesses in existence for less than three years—This exemption ends the first plan year after the three-year anniversary of the business’s inception date or its predecessor employer, if any. 
• Plans maintained by businesses that normally have fewer than 11 employees—This exemption ends on the plan year that starts at least 12 months after the business employs over 10 employees (excluding partners and owners) for more than half of its fiscal year. Full-time employees count as one employee each, while part-time employees count as fractional employees (see Q&A-5 of Treasury Regulation §54.4980B-2).
• Multiple employer plans or pooled employer plans (collectively, MEPs)—Each employer of a MEP is considered separately to determine if a new or small business exemption applies. For example, if an employer normally has less than 11 employees, MAE won’t apply under the MEP for that employer.

Observation—This guidance on when a new or small business exemption will no longer apply will help plan sponsors prepare for the implementation of MAE and its associated additional costs; however, clarification on what constitutes a “predecessor employer” for the new business exemption has been requested in comment letters, as the term is undefined in the proposed regulations.

401(k) or 403(b) plans established before December 29, 2022 (pre-enactment plans), are exempt from MAE. A plan is considered established on the date the plan document is signed or, if later, the signature date of an amendment that adds a 401(k) feature to a profit-sharing plan.

Observation—The proposed regulations confirm the guidance in IRS Notice 2024-2 regarding when a plan is considered established for purposes of MAE.

• Merging a pre-enactment plan with another pre-enactment plan is exempt from MAE.

• Merging a pre-enactment plan with a post-enactment plan isn’t exempt from MAE, unless the plan merger is in connection with a business transaction (e.g., company merger or acquisition); occurs before the end of the following plan year after the business transaction; and the surviving plan is the pre-enactment plan. 

• Merging a pre- or post-enactment plan into a pre-enactment multiemployer plan (a plan maintained under one or more collective bargaining agreements to which more than one unrelated employer contributes) is exempt from MAE. 

• Merging a pre-enactment plan into a MEP (regardless of when the MEP was established) is exempt from MAE.

• Merging a post-enactment plan into a MEP (regardless of when the MEP was established) isn’t exempt from MAE, unless it satisfies the business transaction exception above.

• Merging a profit-sharing plan without a 401(k) feature (regardless of when it was established) into a pre-enactment plan is exempt from MAE.

• Plan spin-offs—If a portion of a plan is spun-off, the resulting plan retains the MAE exemption status of the original plan. For example, a spin-off from a pre-enactment plan remains exempt from MAE even if the spin-off occurs on or after December 29, 2022. This also applies if the plan from which the spin-off occurred is a MEP.  

Observation—Due to the plan merger and spin-off rules, it’s important for plan sponsors to determine the pre- or post-enactment status of a plan after a merger or spin-off to ensure compliance with the MAE mandate.

A pre-enactment plan continues to be exempt from MAE if coverage is expanded to other controlled group members.

Observation—This is beneficial because it allows plan sponsors to expand coverage to other controlled group members without jeopardizing their pre-enactment status.

Contributions made pursuant to MAE must be invested in accordance with the QDIA rules, which also offer fiduciary protection. The proposed regulations make clear that since a pension-linked emergency savings account (PLESA), introduced in SECURE 2.0, can’t be invested in a QDIA, any automatic enrollment feature in a PLESA can’t be used to satisfy MAE.

Observation—Plan sponsors of plans subject to MAE should carefully consider the potential consequences before adopting a PLESA. If they decide to include a PLESA, it shouldn’t have an automatic enrollment feature in addition to MAE due to administrative complexities.

The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made.

MGR0508254469473 5/25