The SECURE 2.0 Act, effective starting in 2025, is a massive piece of legislation that makes over 90 changes to retirement plan and tax regulations. Among other things, the Secure 2.0 Act brings several important changes to 401(k) retirement plans.
This new law mandates that employers automatically enroll new employees in their 401(k) retirement plans starting January 1, 2025. New hires will be automatically enrolled in the company’s 401(k) plan unless they choose to opt out. This means that employees will begin contributing a percentage of their salary to their retirement savings without needing to take any action.
If your company sponsors a 401(k) plan, you will be required to implement these changes by the beginning of 2025. Your company will need to ensure that payroll systems can handle automatic enrollments and contributions. This may involve additional administrative work and potential costs associated with adjusting payroll processes.
What You Need to Know About the New 401(k) Regulations
Here are some important elements that you need to be aware of:
- Increased Catch-Up Contributions: Individuals aged 60 to 63 can make higher catch-up contributions to their 401(k). The catch-up limit for these participants will be the greater of $10,000 or 150% of the regular 2024 catch-up contribution limit. Therefore older workers nearing retirement can save more.
- Automatic Enrollment: Beginning in 2025, new 401(k) plans — those created after December 29, 2022 — must automatically enroll eligible employees at a minimum contribution rate of 3% (up to 10%). This amount will increase annually by 1% until it reaches at least 10%, but not more than 15%. Employees can still opt out or adjust their contribution rate.
In other words, the new 401(k) law provides two choices:
- Auto enroll new employees at 3% and then increase the auto enrollment for those employees by 1% each year until they reach 10%.
- Auto enroll new employees at 10%.
- Part-Time Employee Eligibility: The new law reduces the work requirement for part-time employees to qualify for 401(k) plans. Starting in 2025, part-time employees must work at least 500 hours per year for two consecutive years (down from three years) to be eligible.
What Your Employees Need to Know
Employees should understand that they will be automatically enrolled in the company’s 401(k) plan when they become eligible. That is unless they specifically choose to opt out. They need to know that at least 3% of their salary will be withheld and contributed to the plan. This amount will increase annually by 1% until it reaches between 10% and 15%.
Employers must establish clear opt-out procedures for employees who wish to decline automatic enrollment. It’s important that these processes are straightforward to prevent confusion and ensure compliance with the law.
Another thing workers should know is that, beginning in 2027, lower-income employees may be eligible for a 50% government match on their 401(k) or IRA contributions, up to a maximum of $1,000 per year. This will replace the current Saver’s Credit.
Employees approaching the age of 60 should be made aware that they will be eligible to make increased catch-up contributions to their retirement plans.
Other changes that will especially affect higher-income employees include new rules for taking required minimum distributions (RMDs) from tax-deferred retirement accounts. You may need the assistance of a qualified HR advisor to help you and your employees understand the ramifications of these changes and potential strategies to help your employees maximize their retirement income.
Effective communication is essential to ensure employees understand their rights regarding auto enrollment and the options available within their 401(k) plans. Employers should provide educational resources to help employees make informed decisions about their retirement savings.
How Preferred CFO Can Help
Preferred CFO can ensure that you are compliant with all new laws. Failure to comply with new laws can result in a significant costs to companies. Ignorance of the law will not reduce this cost.
Ready to learn more or request assistance? Contact Preferred CFO today!
