IRS, Treasury Release Proposed Regulations on SECURE 2.0 Provisions

The agencies issued guidance on how plan administrators can comply with the Roth catch-up rule that begins in 2026 and, separately, on requirements for auto-enrollment in new plans.

The Department of the Treasury and the Internal Revenue Service Friday issued proposed regulations for several provisions of the SECURE 2.0 Act of 2022.

The first proposed regulations address the rules for new Roth catch-up contributions, beginning in 2026, as well as other catch-up contributions across different defined contribution plan types.

Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.

Later Friday, Treasury and the IRS issued another set of proposed regulations for the SECURE 2.0 provision that requires newly established 401(k) and 403(b) plans to automatically enroll eligible employees beginning with the 2025 plan year.

The auto-enrollment proposal requires plan sponsors, unless an employee opts out, to “automatically enroll the employee at an initial contribution rate of at least 3% of the employee’s pay and automatically increase the initial contribution rate by one percentage point each year until it reaches at least 10% of pay. This requirement generally applies to 401(k) and 403(b) plans established after Dec. 29, 2022, the date the SECURE 2.0 Act became law, with exceptions for new and small businesses, church plans, and governmental plans.”

A public hearing on the proposed auto-enrollment regulation has been scheduled for April 8, 2025.

Roth Catch-Up Rule

The proposed Roth catch-up contribution regulations reflect comments received in response to Notice 2023-62, issued in August 2023, which extended the deadline for when catch-up contributions made by higher-income participants in 401(k) and similar retirement plans need to be designated as after-tax Roth contributions.

Under Section 603 of SECURE 2.0, the new Roth catch-up rule applies to an employee who is at least 50 years old; participates in a 401(k), 403(b) or governmental 457(b) plan; and whose prior-year Social Security wages from an employer sponsoring the plan exceeded $145,000.

Under the proposed regulation published on Friday, a plan that provides a Roth catch-up election would be required, as is the case for any other Roth contribution, to:

  1. Treat catch-up contributions subjected to the deemed Roth catch-up election as not excludible from the participant’s gross income; and
  2. Maintain the catch-up contributions in a designated Roth account.

The proposed regulation also dictates that employees that would be eligible to make Roth catch-up contributions must have the ability to choose not to make those Roth contributions.

“Under the proposed regulation, a plan would need to permit a participant subject to a deemed Roth catch-up election to elect to cease making additional elective deferrals,” the proposal states.

Age 60 to 63 Catch-Ups

In addition, the proposed regulations provide guidance related to the increased catch-up contribution limit for those aged 60 to 63 under Section 109 of SECURE 2.0.

Beginning this month, employees ages 60 through 63 can contribute the greater of $11,250 or 150% of the current age 50 catch-up limit. At age 64, the limit reverts back to the standard catch-up amount. The proposed regulations also state that for years after December 31, 2025, these increased catch-up contribution amounts are subject to cost-of-living adjustments.

Affected participants also include employees in newly established SIMPLE plans.

In accordance with the universal availability requirement for 403(b) plans, Treasury and the IRS also explained that 403(b) plans must allow all catch-up-eligible participants an effective opportunity to make the same dollar amount of catch-up contributions.

However, Treasury and the IRS “do not believe that a plan should fail to satisfy the universal availability requirement merely because the plan utilizes the increased limit for catch-up eligible participants attaining age 60 through 63.” As a result, a new provision would set forth an exception to the general rule that does not subject all participants to the increased catch-up limit.

The agencies also received comments requesting clarification that designated Roth contributions made at any point within a year may be counted toward satisfaction of the Roth catch-up requirement, even if the designated Roth contributions are made earlier than the contributions that are determined to be catch-up contributions—that is, before the participant is considered to have reached an applicable limit of elective deferrals for the year.

Treasury and the IRS stated that only elective deferrals that are made after reaching the calendar-year limit would be taken into account in satisfying the Roth catch-up requirement.

A public hearing on the proposed regulation has been scheduled for April 7, 2025. Commenters are encouraged to submit public comments electronically via the Federal eRulemaking Portal. Comments are due by 60 days from the date the proposed regulations are published in the Federal Register.

 

401(k) Excessive Fee Litigation Spiked to ‘Near Record Pace’ in ’24

Encore Fiduciary reported a 35% increase in ERISA excessive fee litigation, in part driven by a surge in plan forfeiture lawsuits.

The frequency of Employee Retirement Income Security Act excessive fee class action litigation surged by 35% in 2024, with even more ERISA class action cases filed with novel theories against both defined contribution and defined benefit plans. Most of the increased volume took place in the second half of the year, as filings spiked to a near-record pace.

This deluge of case filings follows an 18-month period, starting in January 2023, with a more moderate pace of filings, as plaintiff firms worked on a backlog of cases. Many of the legacy cases have been settled, however, with three consecutive years of record settlements. Plaintiff firms have filled the void with creative new legal theories, including a wave of forfeiture claims against defined contribution plans and new wellness program, excessive fee and Affordable Care Act fraud theories against defined benefit plans and providers.

Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.

The following is a summary of the key developments in 2024 ERISA excessive fee and class action litigation.

Frequency Up

After 18 months of a lower frequency of excessive fee case filings starting in January 2023, the number of cases filed surged in the second of 2024 by 35%. Many of the recent cases assert the novel forfeiture fiduciary-breach theory. These 28 new forfeiture cases [with 34 total filed to date] allege that plan fiduciaries breached their duty of loyalty to plan participants by applying forfeited plan assets to future contributions obligations instead of reducing participant contributions.

The following chart shows the increased pace of filings in the second half of 2024. The pace has spiked close to a record pace, as plaintiff firms chase the new forfeiture fiduciary-breach theory of liability.

A key change in 2024 is the increase in filings against defined benefit plans, with the same spike in frequency in the second half of the year. The following chart demonstrates the increase in total class action case filings, including complaints related to pension risk transfers (12 cases against nine plan sponsors), actuarial equivalence (three cases), employee stock ownership programs (five cases) and wellness programs [21 cases].

2024 Lawsuit Trends

The driving factor behind the increase in case filings is the expanded number of law firms, including excessive fee legacy law firms like Capozzi Adler P.C. and Walcheske Luzi LLC, filing forfeiture claims. After the six initial forfeiture cases filed in late 2023 were not dismissed with prejudice (five of the six were filed in California), 28 additional forfeiture lawsuits were filed in 2024. The vast majority—21 cases—were filed in the second half of the year.

For the first time, a significant number of the backlog in prior cases has been settled. The 153 total pending cases (out of 526 cases filed from 2016 through 2024) is the lowest number of pending cases in three years. For example, 90 percent of the record number of cases filed in 2020 have now been settled. This appears to be a factor in freeing up legacy law firms to pursue new cases.

The following chart shows the number of cases filed by plaintiff firms in the last three years. It shows the prolific Capozzi Adler (12 cases) and Walcheske (11 cases) firms continue to drive the higher volume of case filings and how many more new law firms are entering the space.

Plaintiff Law Firm Excess Fee Filings from 2022 to 2024

2022 Filings 

2023 Filings 

2024 Filings 

Plaintiff Law Firm 

2022 Cases Filed 

Plaintiff Law Firm 

2023 Cases Filed

Plaintiff Law Firm 

2024 Cases Filed 

 

Capozzi Adler 

21

Wenzel Fenton Cabassa 

10

Wenzel Fenton Cabassa 

4

Miller Shah 

15

Christina Humphrey Law 

4

Capozzi Adler 

12

Walcheske & Luzi

13

Walcheske & Luzi 

8

Walcheske & Luzi

11

Wenzel Fenton Cabassa 

11

Morgan & Morgan (in conjunction with Wenzel Fenton Cabassa) 

7

Morgan & Morgan 

1

Nichols Kaster 

8

Nichols Kaster 

2

Miller Shah 

2

Tower Legal 

4

Tower Legal Group 

2

Haffner Law  

4

Schlichter Bogard & Denton 

3

Capozzi Adler 

6

Edelson Lechtzin 

2

Fair Work 

2

Hayes Pawlenko 

5

Hayes Pawlenko

5

Baillon Thome Jozwiak & Wanta 

2

Bailey & Glasser 

2

Engstrom Lee 

3

Roberts Law 

1

Cohen Milstein 

1

Wade Kilpela Slade 

3

Sanford Heisler Sharp

1

Sanford Heisler 

1

Pomerantz

2

Other firms 

7

Izard Kindall & Raabe 

1

Schlichter Bogard 

1

 

 

Foulston Siefkin 

2

Chirinos Law Firm 

2

 

 

Edelson Lechtzin 

1

Cohen Milstein Sellers & Toll 

1

 

 

McKay Law 

1

Wanta Thome 

1

 

 

Ducello Levitt [but note the complaint follows the Walcheske template] 

1

Milberg Coleman Bryson Phillips Grossman 

2

 

 

Hacker Stephens 

1

The Sharman Law Firm 

2

 

 

Sharp Law

1

Fair Work 

1

 

 

Pomerantz

1

Foulston Siefkin & Figari + Davenport

1

 

 

Scott & Scott 

1

Izard, Kindall & Raabe 

1

 

 

 

 

Johnson Smith Hibbard and Wildman 

1

 

 

 

 

Oliver Law Group 

1

 

 

 

 

Terrell Marshall Law Group

1

 

 

 

 

Barton & Downes 

1

 

Smaller plans were targeted in 2024. Whereas the majority of excessive fee cases in 2023 were filed against jumbo plans with at least $1 billion in asset size, many more smaller plans were sued in 2023, including 13 plans with less than $500 million in assets, nine of which have less than $250 million in assets. 

2024 saw a substantial increase in fiduciary breach class actions lawsuits against defined benefit plans, with 12 challenges to pension risk transfers (against nine companies); more fiduciary-breach cases against health plans, with 21 tobacco or vaccine wellness cases; and the first two purported excessive fee lawsuits against health plans (Johnson & Johnson and Wells Fargo). In the last week of December, two class action complaints were filed directly against medical service providers alleging fraud schemes under the Affordable Care Act. This reflects the increased attention to health plans for new fiduciary-breach theories in class action filings.

Considered more holistically, class action fiduciary-breach lawsuits continue to evolve to challenges or objections to plan design, escalating from what had become routine challenges to plan fees and investments. Instead of claims that fiduciaries failed to prudently follow the terms of plan documents, the lawsuits seek to change the design of plan documents. These claims are essentially challenging how plan benefits are designed by plan sponsors, decisions that in the past were considered settlor functions immune from fiduciary responsibilities.

For example, the forfeiture claims are attempts to change plan design—or least limit fiduciary discretion under plan terms—so that forfeited contributions are applied to reduce participant expenses and not future employer contributions. The pension risk transfer claims are attempts to stop plan sponsors from transferring retirement plans to annuities. The actuarial equivalence cases are attempts to change the mortality tables that sponsors use in their plans to calculate alternative annuities choices.

In sum, as plaintiff firms get more creative, we are seeing more challenges to benefit design.

Settlements Hit Another Record

There were a record 53 settlements in 2024, up from 42 in 2023 and 31 in 2022. The total amount of settlements in 2024 for reported cases was $203.3 million. This trails the record $352.8 million in settlements in 2023, but without the outlier $124.6 million settlement in the Ruane, Cuniff & Goldfarb Inc. case [involving a significant percentage of plan assets invested in one volatile biotech stock], the aggregate settlement amount was close to the 2023 total.

The average settlement, however, continued to decline for the third year in a row. The average settlement in 2024 was $4.6 million ($3.2 million without the outlier UnitedHealth settlement of $69 million, a case that involved unique conflicts of interest evidence). Removing the aforementioned outliers from each year, 2024’s average settlement of $3.2 million is far less than the 2023 average of $5.7 million.

We believe this reflects the continuing trend that certain plaintiff law firms are willing to accept early cost-of defense settlements before the expense of full-blown discovery. The record number of 27 settlements at $2 million or less reflects this trend of earlier and lower settlements.

Daniel Aronowitz is the president of Encore Fiduciary, and Karolina Jozwiak is a legal research analyst at Encore Fiduciary.

«