For WorldatWork Members
- Retirement Plans for Part-Timers, Workspan Magazine article
- Retaining Older Employees? Try Flexible Options and Rewards, Workspan Magazine article
- Checklist: Questions and Resources to Prep Employees for Retirement, Workspan Daily Plus+ article
- How TR Pros Can Help Workers Financially Prepare for Retirement, Workspan Daily Plus+ article
- FAQs to Help You Navigate Employee Retirement Discussions, Workspan Daily Plus+ article
For Everyone
- More Fine-Tuning Ahead for Part-Timer Rules Under SECURE 2.0, Workspan Daily article
- SECURE 2.0 Corrections Act Holdup Leaves Employers Feeling Insecure, Workspan Daily article
- Retirement Plans — Design Considerations & Administration, course
Enacted on Dec. 29, 2022, the SECURE 2.0 Act was meant to encourage more American workers to save for retirement, but the rollout has been somewhat slowed by its complexity and necessary updates. Although some provisions were immediately effective, others have taken time to finalize and get out of the gate.
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Beginning Jan. 1, 2025, several new SECURE 2.0 Act provisions take effect. Three that are most notable for employers (and their employee participants) are catch-up contributions; coverage for long-term, part-time (LTPT) employees; and automatic enrollment and escalation.
Let’s level-set on each of these:
Catch-up Contributions
Up to this point, retirement plan participants aged 50 or older have been able to make extra elective deferrals on an annual basis (a.k.a. “catch-up contributions”), giving those individuals a higher limit. The regular age 50 catch‑up contribution limit is $7,500 for 2024 and 2025. The Jan. 1, 2025, update sets a higher limit of $11,250 for participants who turn age 60, 61, 62 or 63 during the year. If a participant will be age 64 at the end of 2025, the limit reverts to $7,500.
Coverage for LTPT Employees
Under the existing SECURE provisions, employers sponsoring 401(k) plans had to permit employees aged 21 and older who worked at least 500 hours (but less than 1,000 hours) per year for three consecutive years to participate in the plan for elective deferrals (i.e., 401(k) and Roth contributions), said William Robinson, an attorney at law firm Baker Donelson. But starting in January, the consecutive-year requirement gets reduced from three years to two years.
Robinson added that based on current agency guidance, this requirement also applies to employers sponsoring 403(b) plans that are governed by the Employee Retirement Income Security Act of 1974 (ERISA). However, an exemption applies for statutory exclusions under 403(b) plans that are not age- or service-based. The student exclusion is based on a statutory classification (i.e., students performing services at a school, college or university) and is, therefore, not service based, he said. In this case, a 403(b) plan may continue to exclude student employees, regardless of whether they would otherwise satisfy the conditions to be eligible as an LTPT employee.
Due to the underlying differences between 403(b) and 401(k) plans, the Internal Revenue Service issued Notice 2024-73 in October 2024 to expound on some of the fine print. Check it out here.
Automatic Enrollment and Escalation
Beginning with the new year (for calendar-year plans), “new” 401(k) and 403(b) plans (i.e., those established after Dec. 29, 2022) need to automatically enroll their eligible employees at an initial rate of at least 3% but not more than 10% of pay. In each subsequent year, employers must increase the deferral rate for continuing participants by at least 1% per year, up to at least 10% but not more than 15%.
Employees have the right to opt out of automatic enrollment or any annual increases. The employer is obligated to offer this, but employees don’t have to participate. Employees must be given at least 90 days to opt out and take a distribution of any automatic deferrals.
Next Steps
So, how should total rewards professionals proceed, given all the changes?
According to Julie Stich, vice president of content at the International Foundation of Employee Benefit Plans (IFEBP), employers/plan sponsors should:
- Review all new plans that were established after Dec. 29, 2022, to ensure compliance with automatic enrollment and escalation rules.
- Update plan documents to reflect the new requirements.
- Communicate the automatic features to employees, including opt-out options and investment choices.
Baker Donelson’s Robinson noted employers should take extra care to review their plan administration to ensure compliance with the new 2025 requirements of SECURE 2.0.
“Similar to the earlier changes, the provisions effective in 2025 can be operational prior to amending the plan,” he said.
While amendments are not required for most plans until Dec. 31, 2026, lawyers at Baker Donelson said plan sponsors and administrators implementing these changes should:
- Operate the plan in accordance with the SECURE 2.0 requirements even though amendments are not yet required.
- Document all decisions in advance of drafting a formal plan amendment.
- Communicate with employees about relevant changes.
- Take steps to ensure third parties, such as third-party administrators and recordkeepers, can implement changes.
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