SECURE 2.0 Provisions Effective in 2025 for 401(k) and 403(b) Plans
The SECURE 2.0 Act of 2022 includes more than 100 separate provisions focused on updating and reforming the U.S. retirement plan system. It expands on the Setting Every Community Up for Retirement Enhancement Act of 2019 (commonly known as SECURE). Although SECURE 2.0 became law in 2022, its provisions are being phased in over several years. Many already took effect in 2023 and 2024, but there are a number of key provisions going into effect for 2025, including:
- Automatic Enrollment
- Enhanced Catch-up Contributions
- Coverage for Part-time Employees
- Creation of a New Retirement Savings Database
Automatic Enrollment
As of January 1, 2025, all 401(k) and 403(b) plans established after December 29, 2022, must automatically enroll eligible employees in the plan through an eligible automatic contribution arrangement (EACA). Employees must be initially enrolled at a contribution rate between 3% and 10% of their compensation. That contribution rate is also required to automatically increase by 1% annually until it reaches at least 10%, but not more than 15%. Companies with 10 or fewer employees, plans established before December 29, 2022, and those operating for less than three years are exempt from this requirement.
EACAs must allow employees to withdraw automatic contributions (and any earnings) within 90 days of the first contribution without facing the standard 10% penalty on early withdrawals. Employers must also provide plan details to employees, including contribution rates, opt-out procedures, and investment options.
Enhanced Catch-up Contributions
The SECURE 2.0 Act allows 401(k), 403(b), and governmental 457(b) plans to offer higher catch-up contributions for participants aged 60 to 63. While not mandatory, plan sponsors may opt to amend their plans to include this enhanced catch-up option, in addition to the existing catch-up contributions for participants ages 50 or older.
For plans adopting this provision beginning in 2025, eligible individuals may contribute the greater of $10,000 or 150% of the regular catch-up limit, adjusted each year for inflation. For 2025, this means those ages 60-63 may make catch-up contributions up to $11,250, which is 150% of the regular catch-up limit of $7,500 for those under age 60, for a total maximum contribution of $34,750.
Coverage for Part-time Employees
Historically, employers were allowed to exclude employees who worked less than 1,000 hours during the plan year from being eligible to participate in their 401(k) plan. Under the terms of the SECURE Act of 2019, starting with 401(k) Plan years beginning on or after January 1, 2021, part-time employees who completed at least 500 hours of service in three consecutive years and had reached age 21 by the end of the third year were required to be given the opportunity to participate in the Plan. For example, a part-time employee who worked at least 500 hours in each of 2021, 2022 and 2023 must have been given the opportunity to participate in the Plan as of January 1, 2024.
Under the terms of the SECURE 2.0 Act, effective January 1, 2025, the service requirement for part-time employees is reduced from three years to two years. Therefore, a part-time employee who worked at least 500 hours in each of 2023 and 2024 must be given the opportunity to participate in the Plan as of January 1, 2025. SECURE 2.0 also extended this benefit to ERISA-covered 403(b) plans.
Creation of a New Retirement Savings Database
As the modern-day workforce has become more mobile, Congress recognized that it is not uncommon for workplace retirement accounts to be left behind when workers change jobs, or when companies go out of business or are merged into other companies. To try to give workers more tools for tracking down their retirement benefits that may be held by former employers or their successors, SECURE 2.0 requires the U.S. Department of Labor (DOL) to create an online, searchable database that participants and beneficiaries can use to locate retirement plan administrators who may owe them benefits. The secure database will include details about the plan, administrator, and separated vested participants ages 65 and older, including deceased beneficiaries who are entitled to benefits.
The DOL faced a statutory deadline of December 29, 2024, to roll out this database. It was launched slightly ahead of schedule on December 27, but continues to be built-out and populated as additional plan information becomes available.
Deadline for SECURE 2.0 Amendments
The deadline for amending retirement plans to comply with SECURE 2.0 has been extended so that most plans now have until December 31, 2026, to incorporate SECURE 2.0-related changes, with collectively bargained plans and governmental plans having longer. That extension does not alleviate plan sponsors and their third-party administrators from implementing the required operational changes currently.
As the provisions of SECURE 2.0 continue to roll out, they represent a significant shift toward improving retirement savings accessibility and flexibility for American workers. The changes set to take effect in 2025, including automatic enrollment, enhanced catch-up contributions, expanded coverage for part-time employees, and the creation of a retirement savings database, are poised to make retirement planning more inclusive and efficient. Employers and plan sponsors will need to stay informed about these changes to ensure compliance and provide their employees with the most up-to-date retirement benefits. With the deadline for plan amendments set for December 31, 2026, businesses still have time to adjust their plans, but it is essential to begin making necessary operational changes sooner rather than later to fully take advantage of the SECURE 2.0 Act’s provisions.
By: Barbara Murphy Kromer