March 6, 2025
SECURE Act 2.0: What is Effective This Year and What Plan Sponsors Need to Know for 2026
In December 2022, the U.S. government passed the Setting Every Community Up for Retirement Enhancement Act 2.0, landmark legislation affectionally known as the SECURE Act 2.0, as part of the Consolidated Appropriations Act. This Act builds on the original SECURE Act of 2019, which aimed to improve retirement savings options for Americans. This current Act has a long tail, with some provisions that go into effect all the way through 2032. As we have covered in this publication over the last few years, the SECURE Act 2.0 introduces several new provisions designed to help individuals save more for retirement and encourage employers to offer retirement plans.
What to know about 2025 and beyond:
New plan start-ups
As of January 1, 2025, new 401(k) and 403(b) plans must include an automatic contribution and automatic escalation provisions. The automatic contribution must be set at least 3% of compensation; automatic escalation requires contribution increases of one percentage point per year, up to at least 10% but no greater than 15%. Employees can opt out if they wish, but this policy aims to increase retirement plan participation, especially among younger workers who may otherwise delay saving. There are a few company sponsored retirement plans that are excluded from this requirement, including companies with fewer than ten employees and any employer that has not been in operation for at least three years has a grace period. Church and government retirement plans are exempt as well. This change encourages higher participation and applies to new plans created since December 29, 2022.
Long-Term, Part-Time Employees
We have been addressing Long-Term, Part-Time (LTPT) employees with our retirement plan clients since the initial 2019 act which expanded 401(k) eligibility. Initially this made employees who reached the age of 21 and had worked at least 500 hours over three consecutive years eligible to contribute to the plan. The SECURE Act 2.0 shortened the required years of service to two years for plan years beginning after December 31, 2024, and expanded to 403(b) plans that are subject to the Employee Retirement Income Security Act (ERISA).
Required Minimum Distributions
One of the most significant changes in SECURE Act 2.0 is the increase in the age for Required Minimum Distributions (RMDs). Under the original SECURE Act, the RMD age was raised from 70½ to 72. The new law pushed this age further to 73 starting in 2023, and it will rise to 75 by 2033. This change provides individuals with more flexibility in their retirement savings, allowing them to let their investments grow for a longer period before being forced to take distributions leading to more financial security in later years.
Mandatory Roth Catch-Up Contributions for Certain High Earners
In 2026, mandatory Roth catch-up contributions for high earners will be effective. It requires that participants at least 50 years old whose prior-year Social Security wages exceeding $145,000 from an employer sponsoring the plan make catch-up contributions to a Roth account, rather than a pre-tax account. In January, the IRS proposed guidance that included some important clarifications. The $145,000 compensation limit is based on prior year FICA earnings with the same employer that sponsors the plan to which the catch-up contributions are made. This certainly will help as the plan sponsor does not have to track down income with a previous employer. This rule also does not apply to participants who do not pay FICA taxes.
This mandatory provision will require integration between the plan sponsor and their payroll provider to identify that group of participants with FICA wages more than $145,000 and to do so quickly by the end of the year. There is some complexity with this quick turnaround to identify this participant group. Education will be an important feature of this new provision as well. Even within plans where the Roth feature is already popular, some participants may not see the benefits of the Roth after-tax contribution. We certainly would not want to see participants not doing the catch-up because they do not want taxes taken out immediately. We will be working closely with our clients on this new requirement and be ready to assist with the identification of applicable participants and the implementation of the rule.
Enhanced Catch-Up Provision for Participants Aged 60-63
Effective in 2025, an enhanced or “super” catch-up contribution is available if permitted by the plan sponsor. Under the SECURE Act 2.0 plan participants who reach ages 60, 61, 62, or 63 by the end of the year will be able to make an extra catch-up contribution $11,250 rather than the standard catch-up contribution of $7,500 for people 50 or older in 2025. The extra amount for people aged 60-63 is a great incentive to defer more into the retirement plan if one has not been able to save enough earlier in their career. This option has garnered much attention and enthusiasm. Who is not as enthusiastic? Those who are not eligible for the extra catch-up; those attaining age 64 or older in 2025 as the standard catch-up amounts revert back at this age!
The deadline to implement the SECURE 2.0 Act changes to a qualified plan was extended. Now, the amendment required for most qualified plans has been extended until December 31, 2026. In the meantime, a plan sponsor, in good faith, can generally incorporate a mandatory or optional provision in the administration of their plan. We will ensure that all required plan restatements and tack-on amendments are completed timely for those retirement plans which we prepare this documentation.
The Retirement Plan Division within Greenleaf Trust has been actively reviewing and researching all these new provisions within the SECURE Act 2.0. We will continue to assist clients by providing updates as mandatory provisions become effective and provide information and guidance on optional provisions in the years to come.