Correcting 401(k) Auto-Enrollment Failures

Q: I am a registered investment adviser who provides advisory services to 401(k) plan committees. Some of my client plans include auto-enrollment features, and I am aware that a few of them have had administrative problems with implementing the automatic-enrollment feature by missing enrollment for some eligible employees. I want to educate my client about addressing these issues. Is there a way to correct this error without jeopardizing the tax-qualified status of the plan and, if so, will the employer have to make an additional contribution–i.e., a qualified nonelective contribution?

A: The good news is that the SECURE 2.0 Act of 2022 includes a special safe harbor correction provision that addresses this issue. The SECURE 2.0 safe harbor is similar to the special safe harbor correction method which expired on December 31, 2023 (the “pre-2024 safe harbor”) set forth under the IRS’ Employee Plan Compliance Resolution System, which describes correction procedures for addressing a wide range of plan operational errors.

The SECURE 2.0 safe harbor establishes a permanent correction procedure for auto-enrollment failures after December 31, 2023. If the error is corrected under the SECURE 2.0 safe harbor procedures, then the plan’s tax-qualified status will not be jeopardized. Also, if the correction procedures are followed, the employer will not need to make a qualified nonelective contribution for the missed deferrals, although the employer will need to make a matching contribution if the employee would otherwise have been entitled to the matching contribution.

There are five key conditions to address the issue, discussed further below.

1. Covered Errors

Fred Reish

The failure must be due to a reasonable administrative error that resulted in one of the following:

• A failure to implement an automatic-enrollment or automatic-escalation feature with respect to an eligible employee;
• A failure to implement an affirmative election made by an eligible employee covered by the automatic-enrollment feature; or
• A failure to provide the eligible employee with an opportunity to make an affirmative election because the employee was improperly excluded from the plan.

Although the term “reasonable administrative error” is not defined, it is reasonable to conclude that an innocent mistake would qualify, whereas an intentional error would not. For instance, unintentionally omitting an eligible employee from census data used to implement the automatic enrollment feature would likely satisfy this condition.

2. Correction Period

The time period for correcting the error depends upon whether the error is first discovered by the employer or by the employee (who then informs the employer of the error).

If the employee notifies the employer of the error, the correction must be made by the date of the first payday for that employee on or after the last day of the month following the month in which the employee notified the employer. For example, if an employee notified her employer on January 1, 2025, the correction must be made by the first payday on or after February 28, 2025.

If the employer first discovers the error, then the correction must be made by the date of the first payment of compensation to the affected employee on or after the last day of the 9.5-month period after the end of the plan year during which the error occurred. For example, if on January 1, 2024, ABC Company failed to enroll Ann Jones due to an implementation error, and Ann does not inform ABC Company of the error, ABC Company has until the date of the first payment of compensation made to Ann on or after October 15, 2025, to begin deducting deferrals from her paycheck, unless Ann affirmatively opts out of the automatic-deferral feature. The act makes clear that the correction may occur before or after the participant has terminated employment.

If the mistake was not due to a reasonable administrative error, or if the correction is not made within these time limits, the consequences to the employer are more severe. As a result, it is critical that mistakes are found and corrected on a timely basis.

3. Matching Contribution (if Provided by the Plan)

Joan Neri

If the plan provides for matching contributions and the employee would have been entitled to a matching contribution had the missed deferrals been made, the plan sponsor must make a corrective allocation of matching contributions on behalf of the employee in an amount equal to the matching contribution the employee would have been entitled to, adjusted to account for earnings had the missed deferrals been made. In other words, the matching contribution must be made as if the employee were automatically enrolled at the right time. In this case, the missed deferrals could be calculated as if the employee were enrolled at the initial deferral rate under the plan and, if the plan included automatic deferral increases, any missed matching contributions would need to be accordingly increased.

The Department of Labor has not yet provided guidance on how to calculate the missed earnings. We think one reasonable approach would be to use the earnings on the qualified default investment alternative that the employee would have been defaulted into if the employee did not make an investment election. If the correction procedures outlined here are followed, then no employer contribution—such as a QNEC—is required to account for the missed deferrals themselves.

4. Implementation on Nondiscriminatory Basis

The correction must be implemented for all similarly situated participants in a nondiscriminatory manner. For instance, if an employer plan sponsor fails to automatically enroll 10 employees due to the same implementation error, the correction process for all 10 employees should be implemented at the same time and in the same manner.

5. Notice to Affected Employees

The plan sponsor must provide notice of the error to the affected employee not later than 45 days after the date on which correct deferrals begin. Under current IRS guidance, the notice should include the information required under the pre-2024 safe harbor. For active participants, this information includes a description of the error, a statement that deferrals have begun and an explanation of how the participant may change his or her deferral percentage.

Concluding Thoughts

When you conduct meetings with your 401(k) clients who have auto-enrollment features, you can educate them about this safe harbor correction program. For most clients who established 401(k) plans on or after December 29, 2022 (the enactment date of the SECURE Act 2.0 of 2022), the implementation of automatic enrollment will be required starting January 1, 2025 (for calendar year plans). Those clients should know about this correction program if an employee is not properly enrolled in the plan.