New 401(k) Provisions That Become Effective in 2025
Key 401(k) Changes in 2025 Under SECURE 2.0
Starting January 1, 2025, several important updates to 401(k) retirement plans will take effect. These changes come from the SECURE 2.0 Act and affect both employers and employees. They include automatic enrollment for new plans and expanded eligibility for part-time workers. Understanding these rules now can help businesses prepare and employees make informed decisions about their retirement savings strategy.
Automatic Enrollment for New 401(k) Plans
Beginning in 2025, most newly created 401(k) and 403(b) plans must include automatic enrollment. This rule applies to plans established after December 29, 2022. It affects a wide range of employers, with some notable exceptions.
Exemptions include:
- Employers with 10 or fewer employees
- Businesses operating for less than 3 years
- Governmental, Church-based, and SIMPLE plans
Existing plans are not required to comply with the new automatic enrollment rule. However, employers may choose to adopt it voluntarily.
With automatic enrollment, eligible employees are automatically enrolled to contribute to their retirement plan unless they actively opt out. The employer sets the starting contribution rate. This must be between 3% and 10% of the employee’s pay.
Each year, the contribution rate must increase by 1%. This continues until the deferral rate reaches at least 10%, but not more than 15%.
Studies show that automatic enrollment leads to higher participation rates. It encourages workers to save for retirement without requiring them to take action. However, critics argue that it may catch some employees off guard. Without knowing how to opt out, they might contribute when they cannot afford to do so.
Expanded Eligibility for Part-Time Workers
Prior to the SECURE Act, employers could exclude part-time employees from contributing to 401(k) plans unless those employees worked at least 1,000 hours in a single year and were over age 21. This standard left out many workers who consistently worked fewer hours over longer periods.
The original SECURE Act changed that. It required employers to allow part-time employees to participate if they had worked at least 500 hours per year for three consecutive years. The employee also had to be at least 21 years old by the end of the three-year period. However, service before 2021 did not count toward this threshold.
As a result, many employees who started in 2021 or earlier became eligible to contribute to a 401(k) plan on January 1, 2024.
Under SECURE 2.0, Congress improved access by reducing the required service from three years to two years. The 500-hour-per-year threshold remains. Periods before 2023 do not count toward the calculation. This means many part-time employees hired in 2023 or earlier—and who were not already eligible—will qualify to contribute beginning January 1, 2025.
The rule continues to apply only to elective deferrals. Employers are not required to offer matching or profit-sharing contributions under these provisions.
Importantly, the 1,000-hour rule from before SECURE 1.0 still applies if it allows for earlier eligibility. Employers may also choose to offer more generous eligibility terms for their plans.
These new eligibility rules also apply to part-time employees in ERISA-covered 403(b) plans starting in 2025.
How Employers Should Prepare
Employers setting up new retirement plans must include automatic enrollment unless they fall into one of the exempt categories. Those that already offer plans may want to consider adopting automatic enrollment voluntarily to increase participation rates and support long-term employee financial wellness.
Businesses should also review their tracking systems for part-time employees. Accurate hour-tracking over two consecutive years will become essential to determine eligibility. Employers may need to revise payroll processes and employee handbooks to reflect the new standards.
Benefits for Employees
Employees stand to gain more access and earlier participation in retirement savings. Automatic enrollment helps many workers begin saving without needing to take initiative. Part-time employees gain the opportunity to build retirement savings despite working fewer hours annually.
Employees should review their paystubs and HR communications closely. They need to know if automatic enrollment applies to them and how to opt out if they prefer not to participate.
Compliance and Legal Considerations
Employers should ensure that retirement plan documents reflect the 2025 changes. Working with legal counsel or plan administrators can help avoid penalties for noncompliance.
Plans must clearly communicate eligibility and enrollment changes to employees. Failure to notify employees about automatic enrollment or opt-out options may result in legal complications or plan disqualification.
Employers should also update summary plan descriptions and provide regular reminders during open enrollment or onboarding sessions.
FAQs About 401(k) Changes in 2025
Who must adopt automatic enrollment in 2025?
Employers starting 401(k) or 403(b) plans after December 29, 2022, must use automatic enrollment unless they fall under the small employer, new business, government, church, or SIMPLE plan exemptions.
What contribution rate should be set for automatic enrollment?
Employers must begin with a rate between 3% and 10% of pay. They must increase it by 1% annually until it reaches 10%–15%.
Can part-time employees get matching contributions?
No. The new rule only affects eligibility for making their own elective deferrals. Matching contributions remain subject to existing plan rules.
Does this affect existing 401(k) plans?
The automatic enrollment requirement only applies to new plans. However, existing plans may adopt the feature voluntarily.
Secure Your Retirement Future
Understand how the 2025 401(k) changes impact your savings strategy. Schedule a complimentary consultation with a licensed retirement advisor today.
Christian Cordoba, founder of California Retirement Advisors, has been a member of Ed Slott's Master Elite IRA Advisor Group since 2007.