New 401(k) Provisions That Become Effective in 2025
Get ready! Several new 401(k) provisions from the SECURE 2.0 Act kick in on January 1, 2025. One that we’ve already written about is the ability of employees to make extra catch-up contributions in a year they turn age 60, 61, 62 or 63 by the end of the year. (This “super catch-up” also applies to SIMPLE IRA participants.) Here are two others:
Automatic Enrollment
Most newly-established 401(k) (and 403(b) plans will be required to institute automatic enrollment. This requirement doesn’t apply to plans established before December 29, 2022 – the date SECURE 2.0 was enacted. It also doesn’t apply to plans started by employers with 10 or fewer employees, new employers (those that have been in business for less than three years), and church-sponsored plans, governmental plans or SIMPLE plans. Of course, existing plans have been (and continue to be) free to institute automatic enrollment if they want.
What does automatic enrollment mean? It means that, unless they opt out, covered employees will be required to make elective deferrals. The employer can set the deferral rate for those who don’t opt out – as long as the rate is at least 3% of pay and no more than 10% of pay. Each year after that, the employer must increase the required deferral rate by 1% until it reaches a rate of at least 10% and no more than 15% of pay.
A number of studies have shown that automatic enrollment is an effective way of boosting participation in 401(k) plans. However, some critics have argued that many employees are effectively duped into contributing when they can’t afford it since they aren’t aware of the opportunity to opt out.
Participation by Part-Time Employees
Before the SECURE Act, 401(k) plans could exclude part-time employees if they did not work at least 1,000 hours of service in a 12-month period or were under age 21. These rules have prevented many long-term part-timers from the opportunity to save in 401(k) plans.
The SECURE Act provided relief by requiring plans to permit any employee who has worked at least 500 hours in three consecutive 12-month periods (but excluding periods before 2021), and who is age 21 or older by the end of the three-year period, to start making elective deferrals. This allowed many previously ineligible part-time employees hired in 2021 or earlier to start participating on January 1, 2024.
In SECURE 2.0, Congress kept the age-21 requirement, but shortened the consecutive 12-month periods from three to two (but excluding periods before 2023). This means many part-timers hired in 2023 or earlier and not already eligible will be able to start saving as of January 1, 2025.
Employers are free to apply more liberal eligibility rules for their 401(k) plan. Also, neither the SECURE Act nor the SECURE 2.0 rules replace the pre-SECURE Act 1,000-hour/age 21 rule if that rule allows an employee to participate earlier than under the new rules. Finally, keep in mind that these part-time rules only apply for purposes of eligibility for elective deferrals – not eligibility for employer contributions.
Besides 401(k)s, the new SECURE 2.0 rule also covers part-timers under ERISA-covered 403(b) plans, starting January 1, 2025.
By Ian Berger, JD
IRA Analyst
Ed Slott and Company, LLC
Christian Cordoba, founder of California Retirement Advisors, has been a member of Ed Slott's Master Elite IRA Advisor Group since 2007.