SECURE 2.0 Act – 2025 Changes

Quick-Take: The SECURE 2.0 Act was passed almost two years ago. Some of its new provisions only become effective starting in 2025. A short reminder of those changes to qualified plans follows:

Plan Amendments:  The deadline to implement the SECURE 2.0 Act changes to a qualified plan was extended last year. Now, most qualified plans have until December 31, 2026 to make those changes with plan amendments. If the qualified plan is collectively bargained, the deadline to make the amendments to the qualified plan is pushed back even further to December 31, 2028.

Automatic Enrollment: For new qualified plans, e.g., 401(k) and 403(b) plans, the SECURE 2.0 Act requires there to be an automatic enrollment provision in the plan, starting on January 1, 2025. If a qualified plan is established after December 29, 2022, it will be required to automatically enroll eligible employees in the plan through an automatic contribution arrangement. These provisions require employers to enroll eligible employees at a default contribution rate between 3% and 10% of their compensation. Then, there is an annual escalation of 1% to the automatic contribution rate until the contribution rate reaches at least 10%, but no more than 15%. An employee-participant will have the ability to opt out or adjust their contribution levels. An employer with less than 10 employees, or one which has been operating for less than 3 years is exempt from this automatic enrollment provision.

Part-Time Employees: In the past, an employer could exclude from qualified plan participation employees who worked less than 1,000 hours during the plan year. Under the SECURE Act, 401(k) plans had to allow an employee who had reached the age of 21 to contribute to the 401(k) plan if that employee worked a minimum of 500 hours with the employer for at least 3 consecutive years. With the SECURE 2.0 Act, this 3-year service requirement is reduced to 2 years, starting in 2025.

Catch-up Contributions: We have covered this change in the past with other missives. We know that a participant in a 401(k) or 403(b) plan who is age 50 by the end of the calendar year can make a catch-up contribution to the plan. Starting in 2025, a plan participant age 50 or older can make a catch-up contribution of up to $7,500 in addition to the annual deferral limit of $23,500 to their 401(k) account, meaning a total annual contribution could be made by the participant to to his/her 401(k) account of $31,000. Under the SECURE 2.0 Act, for plan participants who reach ages 60, 61,62, or 63 by the end of the year, they will be able to make an even larger make-up contribution of up to the greater of $10,000 or 150% of the standard catch-up contribution amount. Accordingly, the maximum catch-up contribution for this class of plan participants is $11,250. These catch-up contributions can be made by these class members on either a pre-tax or after-tax basis, but only if permitted by the plan sponsor. In the future, these catch-up contribution amounts will be indexed to inflation. Note, however, that a qualified plan is not required to offer either the age-50 catch-up opportunity or this new, higher, catch-up opportunity to the age 60 to 63 class. This new provision is effective starting in 2025.