SECURE 2.0: 2025 Retirement Plan Changes
SECURE 2.0 is changing retirement savings options by offering more access to saving opportunities and making it easier for individuals to save for their future. Among its various provisions, a couple of key changes take effect in 2025. Let’s explore those provisions and the pros and cons of including them in your plan.
Additional Catch-Up Contributions
Currently, if allowed in the plan, individuals aged 50 or older can make additional catch-up contributions to their 401(k), 403(b), or governmental 457(b) plan accounts. The new provision allows participants aged 60 to 63 to contribute even more. The allowed catch-up contribution will increase to 150% of the age 50 catch-up limit for that taxable year. Here’s a breakdown of what that will look like in 2025:
50 or Older Contribution Limit | 60 to 63 Contribution Limit |
$7,500 | $11,250 |
Here are some things to consider about the catch-up provision:
- Competitive Advantage in Hiring: Prioritizing retirement savings and offering catch-up contributions can attract top talent and position the company as one that values their employees. Also, experienced job seekers may seek employers who offer opportunities for increased retirement savings.
- Tax Benefits: Pre-tax catch-up contributions help employees reduce their taxable income and gain tax advantages.
- Considerations: Does your plan currently allow catch-up contributions? If not, there will be plan sponsor considerations such as plan document amendments and applicable Salary Reduction Agreements being updated. Payroll systems must also recognize eligible participants and permit the increased limits.
Automatic Enrollment
Organizations with 401(k) and 403(b) plans established after December 31, 2019, will be required to offer automatic enrollment for their employees. Some companies will be exempt from this provision such as:
- Companies with ten or fewer employees
- Companies that have been in business for less than three years
- Church or government agencies, including public schools
Those required to participate in automatic enrollment, must enroll employees at a minimum contribution rate of 3% up to 10%. The contribution rate will escalate by 1% per year, with a maximum automatic enrollment rate of no less than 10% and no greater than 15%. However, it's important to note that employees still have the option to opt out and change their contribution rates and investment options.
Here are some things to consider before offering automatic enrollment:
- Increased Employee Participation: By automatically enrolling employees, employers remove the hesitation that prevents individuals from actively opting into a retirement plan. This could lead to a more engaged and financially prepared workforce.
- Enhanced Employee Retirement Savings: Automatic enrollment is fast and easy. Contributions would begin immediately, allowing employees to take advantage of the growth potential of their savings over a longer period.
- Other Mandatory Contributions: For public schools, offering automatic enrollment may not be appealing. If employees are already required to contribute to a state pension plan, they may not see the benefit of having to contribute to both plans. Though employees can opt out, initially forcing the enrollment may leave them dissatisfied.
Your Next Step
It's important to note that implementing SECURE 2.0 provisions may involve administrative considerations and costs for employers. Employers should consult with their retirement plan providers, legal professionals, and financial advisors to ensure compliance with SECURE 2.0 and determine the most appropriate approach for their retirement plan.
This blog is up to date as of November 2024 and has not been updated for changes in the law, administration or current events.