Democrats introduce mandatory 401(k) plan reenrollment legislation

On February 18, 2022, Senator Kaine (D-VA) (in the Senate) and Representative Manning (D-NC) (in the House) introduced the Auto Reenroll Act of 2022, a bill that would require 401(k) plans taking effect in 2025 or after to provide for a 3-year reenrollment of non-contributing participants in order to take advantage of the automatic enrollment testing safe harbor, allow certain “permissible withdrawals,” or assert state preemption for default contributions.

Briefly:

The Auto Reenroll Act would require a plan to impose a 3-year auto-reenrollment rule on 401(k) plans in three circumstances –

To qualify for the automatic contribution testing safe harbor:

Plans that take effect in 2025 or after would have to provide, every 3 years, that every employee eligible to make contributions under the plan that was not making contributions would, in effect, be “re-defaulted,” subject to an election to opt out, into the plan at the plan’s qualified percentage rate (generally at least 3% and increasing annually to 6%).

To allow “permissible withdrawals”:

Eligible automatic contribution plans (“under which the participant is treated as having elected to have the employer make [salary reduction] contributions in an amount equal to a uniform percentage of compensation“) may, under the Internal Revenue Code, allow a participant that has been defaulted into the plan to withdraw default contributions within 90 days of the employee’s first contribution. To allow these sorts of withdrawals, plans that take effect in 2025 or after would, every 3 years, have to re-default non-contributing participants into the plan, subject to an election to opt out.

To assert that certain state wage withholding laws are preempted:

Some states prohibit wage withholding without affirmative employee consent. ERISA’s preemption provisions include a rule that ERISA supersedes any state law “which would directly or indirectly prohibit or restrict the inclusion in any plan of an automatic contribution arrangement.” For automatic contribution plans that take effect in 2025 or after, this ERISA protection against state withholding laws is available only if, every 3 years, non-contributing participants are re-defaulted into the plan, subject to an election to opt out.

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As noted, at this point this bill does not have bipartisan sponsorship. There is, however, some bipartisan sentiment in favor of reenrollment programs generally – 2021 Portman-Cardin legislation includes a small employer reenrollment tax credit of  $500 per year for each 3-year reenrollment period implemented.

We will continue to follow this issue.

This is a publication of O3 Plan Advisory Services. If you have any comments, or have questions about regulatory developments, please contact your relationship manager or Mike Barry at mbarry@octoberthree.com.  The information, analyses and opinions set out herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity. Nothing herein constitutes or should be construed as a legal opinion or advice. You should consult your own attorney, accountant, financial or tax advisor or other planner or consultant with regard to your own situation or that of any entity which you represent or advise. Information set out or referred to above has been obtained from sources believed to be reliable. However, neither O3 Plan Advisory Services nor any of its affiliates has verified the accuracy or completeness of any such information. All information is provided “as is” and O3 Plan Advisory Services and its affiliates expressly disclaim all express and implied warranties regarding the information. Neither O3 Plan Advisory Services nor any of its affiliates shall have any liability for any use of the information set out or referred to herein.