Automatic Enrollment and Catch-up Contributions for Multiemployer Defined Contribution Plans

On January 10, 2025, the IRS issued proposed regulations (Proposed Regulations) regarding automatic enrollment and catch-up contribution provisions of the SECURE 2.0 Act of 2022 (SECURE 2.0). Following is a high-level summary of some key provisions in the Proposed Regulations affecting Multiemployer Defined Contribution (DC) plans.

Mandatory Auto-Enrollment and Auto-Escalation

Background:
Secure 2.0 requires DC plans with 401(k) arrangements established on or after December 29, 2022 to require auto-enrollment for all eligible participants. This requirement applies to new DC plans created on or after December 29, 2022, and DC plans in existence prior to December 29, 2022, that later adopt 401(k) features (allowing participants to elect to defer a portion of their wages to an individual account under the Plan) on or after December 29, 2022.

Auto-Enrollment and Auto-Escalation Requirements:

• Unless an eligible participant makes an affirmative contribution election under the plan, the default election made on behalf of the participant during the “initial period” must be a uniform percentage that is not less than 3% and not more than 10% of compensation. An eligible participant’s “initial period” is the period beginning when the participant is first eligible to elect to have contributions made to the plan and ends on the last day of the following plan year.
• Following the initial period, the percentage contribution under the default election must be increased by 1% each year until the auto-enrollment level reaches at least 10% (plans can decide to go to as high as 15%).
• The amounts contributed under the auto-enrollment requirements are to be invested based on the plan’s Qualified Default Investment Alternative unless the participant makes an investment election under the plan.
• Participants subject to the auto-enrollment requirements must be provided with the opportunity to withdraw their automatic contributions, plus earnings on the contributions, within 90 days after the first auto-enrollment contribution is made.

Multiemployer plans:
Under the proposed regulations, a multiemployer DC plan with a 401(k) arrangement in effect prior to the enactment of SECURE 2.0 (“pre-enactment plan”), would remain a pre-enactment plan with respect to new employers that join the plan after December 29, 2022.

A profit-sharing plan that first adds 401(k) arrangements after December 29, 2022 would not be considered a pre-enactment plan, and therefore, would be subject to the mandatory auto-enrollment and auto-escalation requirements.

• Rael & Letson Observations: For multiemployer DC plans with 401(k) arrangements that are not “pre-enactment” plans, satisfying the auto-enrollment and auto-escalation requirements will be challenging. Auto-enrollment within a multiemployer plan creates an administrative burden and compliance challenges resulting from participants moving between employers. In addition, 401(k) plans in the multiemployer industry often have a menu of flat dollar employer deferral options instead of percent of pay deferral options.

Catch-Up Contributions

Background:
SECURE 2.0 requires that, effective in the 2024 calendar year, all catch-up contributions must be Roth (after-tax) contributions for participants who received prior year FICA wages in excess of $145,000 (adjusted for inflation). The deadline for implementing this requirement has been extended, as noted below.

Roth Catch-Up Contribution Requirements:

• For collectively bargained plans, Roth catch-up requirements will be effective the first tax year beginning six months after publication of the final rules, or if later, the first tax year beginning after the date on which the last collective bargaining agreement in effect on December 31, 2025 expires.
• For multiemployer plans, a participant’s FICA wages earned from more than one employer in a year are not aggregated for purposes of determining whether the participant’s wages exceed the applicable Roth catch-up wage threshold. The Roth catch-up contribution mandate only applies to catch-up contributions attributed to earnings from an employer that exceed the Roth catch-up wage threshold ($145,000 in 2024 for 2025).
• Deemed Roth catch-up contribution elections can be implemented by plan sponsors. Under this process, participants who are required to make catch-up contributions as designated Roth contribution are deemed to have irrevocably designated any elective deferrals that are catch-up contributions as designated Roth contributions.
• Plan sponsors are not required to offer a Roth contribution option. If offered to those above the Roth catch-up wage limit, Roth contributions must also be offered to all other catch-up eligible participants. For plans without a Roth contribution option, participants who are subject to the Roth catch-up contribution mandate (catch-up contributions must be designated Roth contribution), would be prohibited from making any catch-up contributions.

Enhanced Catch-Up Contributions:

• Catch-up eligible participants who attain age 60, 61, 62, or 63 during the taxable year are eligible to make enhanced catch-up contributions that are equal to 150% of the catch-up dollar limit ($7,500 increases to $11,250 in 2025).
• Plans are not required to offer enhanced catch-up contributions for participants aged 60, 61, 62, or 63.

Rael & Letson Observations:

Roth contributions can be attractive for younger participants as the investment earnings are not subject to tax. However, the requirement that catch-up contributions be Roth contributions for participants earning above the Roth catch-up wage threshold complicates the administration for multiemployer plans with catch-up contributions. Because Roth contributions are after-tax contributions, many employers and plan administrators (including recordkeepers) would now have to adapt their processes and systems to track a new type of contribution for highly paid participants. This burden may lead Boards to avoid Roth contributions, which would eliminate catch-up contributions for highly paid participants. Alternatively, in an effort to balance administration, some Boards may consider replacing 401(k) pre-tax with Roth after-tax contributions and continue offering catch-up contributions. In any event, multiemployer Boards will likely have a few more years to contemplate change to their catch-up approach.