As we approach 2025, there are several changes that must go into effect for employer-sponsored retirement plans, such as 401(k)s or 403(b)s. These changes originated from SECURE Act 1.0, signed into law in December 2019, and SECURE Act 2.0, signed into law in late 2022. The Acts contain several new provisions, scheduled to take effect over several years. Understanding these changes, and communicating them to employees, will be crucial for business owners to ensure plan compliance, to optimize plan offerings, and to ensure the plan provides up-to-date provisions.
New Provisions Under the SECURE Act, Starting in 2025:
- Automatic Enrollment Requirement: One of the most significant changes is the mandate for automatic enrollment in new 401(k) and 403(b) plans. Beginning in 2025, businesses establishing new retirement plans must automatically enroll eligible employees at a contribution rate equal to at least 3% of the employee’s pay, increasing by 1% annually until reaching at least 10%. Employers must ensure their payroll systems can support this automatic enrollment feature and provide employees with clear opt-out instructions if they choose not to participate.
- Enhanced Catch-Up Contributions: SECURE Act 2.0 raises the catch-up contribution limits for employees aged 60 to 63, allowing them to save more as they approach retirement. Starting in 2025, catch-up contributions will be increased to the greater of $10,000 or 50% more than the regular catch-up amount (currently $7,500 for 2024). Employers must update their plan documents and payroll systems to accommodate this change and inform eligible employees about the increased savings opportunities.
- Expanded Access for Part-Time Workers: SECURE Act 1.0 requires employers to allow long-term, part-time employees to participate in 401(k) plans. Starting in 2025, this rule becomes more stringent, requiring businesses to include part-time employees who have worked at least 500 hours per year for three consecutive years. Employers need to review their employee census to identify eligible employees.
- Student Loan Matching: SECURE Act 2.0 introduced an optional provision allowing employers to make matching contributions to an employee’s retirement plan based on their student loan payments. This change, effective in 2025, provides a unique way for employers to support employees who might otherwise forgo retirement savings to pay off student loans.
Preparing for Compliance
To ensure compliance with the upcoming changes, business owners should work with their plan recordkeeper, TPA, and financial advisor to take the following steps:
- Review and Update Plan Documents: Ensure that your retirement plan documents are updated to reflect all relevant changes from SECURE Act 1.0 and 2.0. This includes updating eligibility criteria, contribution limits, and distribution rules.
- Employee Communication: Develop a communication strategy to inform employees about the upcoming changes, especially those related to automatic enrollment, catch-up contributions, and new participation opportunities for part-time workers.
Conclusion
The retirement landscape is evolving, and with the changes introduced by the SECURE Acts 1.0 and 2.0, business owners must be proactive in updating their retirement plans. By understanding these changes and taking the necessary steps to communicate these changes to employees, businesses can ensure compliance and continue to provide valuable retirement benefits to their employees.
At Pathfinder, we have helped business owners with retirement plans for over 20 years. If you are a businessowner and would like to review your current retirement plan structure, please gives us a call at (910) 793-0616. We will work you with to ensure your plan is fully compliant with current legislation and maximizes the benefit to both your company and employees.
Advisory services offered through Commonwealth Financial Network®, a Registered Investment Advisor.