With 2025 in full swing and the new administration in D.C. complete, change is inevitable. However, there are new employee benefit plan provisions taking effect this year driven by existing laws such as the Employee Retirement Income Security Act of 1974 (ERISA) and the Setting Every Community Up for Retirement Enhancement Act of 2022 (SECURE 2.0). Below, we will review those changes and offer additional insight.
Automatic enrollment will be required for new plans
New 401(k) and 403(b) plans adopted after December 29, 2022, must comply with SECURE 2.0. Starting January 1, 2025, employers need to automatically sign up eligible employees for these plans, with an initial deferral percentage set between 3% and 10% of their salary. Automatic contributions will increase by at least 1% each year until you reach a deferral rate of at least 10%, but not more than 15% (10% until January 1, 2025). Participants can choose to opt out of automatic enrollment or automatic escalation whenever they want.
Some things might not need to follow the new requirements:
- Plans that were in place on or before December 29, 2022.
- Organizations that have been around for under three years.
- Small businesses with less than 10 employees.
- Plans from church and government.
Increases in catch-up contributions
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) was the first to introduce catch-up contribution options to help older workers boost their retirement savings. Under EGTRRA, plan sponsors could voluntarily amend their plans to allow participants aged 50 and older to contribute additional amounts to their 401(k), 403(b), and 457(b) plans. Before December 31, 2024, catch-up contributions to these plans were limited to $7,500, adjusted for inflation.
Starting from taxable years after December 31, 2024, the limits on contributions will be different. People between 60 and 63 can add extra contributions of either (i) $11,250 or (ii) 150% of their contribution limit for 2024, adjusted for inflation after 2025.
For SIMPLE IRA plans, before December 31, 2024, participants in SIMPLE IRA plans that allow catch-ups could contribute up to $3,500, as indexed. Moving forward, the contributions depend on the participant’s age (either 50 to 59 or 64 and older by December 31, 2025) and the company’s number of employees. A participant can contribute between $3,850 and $5,250, depending on these factors, in addition to their regular deferrals.
Benefits for long-term part-time workers
The original SECURE Act required employers to include certain part-time employees in their 401(k) plans. To be eligible, the employee needs to have worked a minimum of 500 hours each year for three years in a row and must be at least 21 years old by the end of those three years. The employee also would earn vesting credits for all years with at least 500 hours of service.
SECURE 2.0 shortens the three-year period to two years for plan years starting after December 31, 2024. But any service done before January 1, 2021, doesn’t count for eligibility or vesting.
Although SECURE 2.0 extends this rule to apply to 403(b) plans that are subject to ERISA, the rule does not apply to union plans or defined benefit plans.
Distributions for some long-term care premiums
Plan participants may receive distributions of up to $2,500 per year to pay for quality long-term care insurance without triggering the 10% early withdrawal penalty that might otherwise apply. This optional change for plan sponsors will take effect for distributions made after December 29, 2025.
The database for lost and found items
Managing or accessing retirement funds can get tricky when people switch jobs. To help reunite participants and their missing retirement plans, SECURE 2.0 required the Employee Benefits Security Administration to provide a search tool or database of benefits by December 29, 2024. At this time, participation is voluntary, with some groups expressing concern about the breadth of information initially requested by the Department of Labor to populate the database.
Are you all set for 2025?
By staying informed and prepared, plan sponsors can navigate these changes effectively. Plan sponsors need to take the initiative to review and update their plans to make sure they meet these new requirements.
If you have questions about the compliance of your plan or would like more detailed guidance, contact our Employee Benefit Plan Audit team for more assistance.