Automatic Enrollment Mandate
SECURE 2.0 mandated that almost all “new” 401(k) and private sector 403(b) plans automatically enroll their eligible employees and then automatically increase their deferral rates on a regular basis. However, those plans don’t have to begin the automatic enrollment until January 1, 2025. Because of that delay in time, there’s concern that some of the affected plan sponsors have forgotten about the January 1, 2025 effective date and, as a result, may inadvertently fail to comply, which could disqualify their plans, resulting in penalties and the unexpected costs of additional contributions.

Before going into more detail, let’s step back and look at these SECURE 2.0 automatic enrollment rules. First, a “new” plan is one that was established on or after the date of enactment, December 29, 2022. “Small” and “new” employers are excluded from the requirements, until they are no longer small or new. “Small” is defined as having 10 or fewer employees; however, once the employer has more than 10 employees, it will be subject to the automatic enrollment and automatic deferral increase requirements. “New” is defined as being in existence for less than three years; however, once the employer has been around for more than that, it will be subject to the new rules.

Now, let’s look at the details of the requirements. Beginning January 1, 2025 (for calendar year plans), new 401(k) and private sector 403(b) plans must automatically enroll their eligible employees at an initial rate of at least 3% of pay. Then, each year thereafter, the deferral rates for continuing participants must be increased by at least 1% per year up to 10% of pay. Of course, the affected employees can opt out of automatic enrollment or of any of the annual increases. The obligation is on the employer, not the employees.

Unsuspecting plan sponsors could be hurt by a lack of knowledge of these requirements.

The consequence of failing to automatically enroll or increase as required is plan disqualification. If there is failure to comply, it can usually be self-corrected, but it will, in most cases, involve the cost of contributions for the employees who weren’t automatically enrolled, plus interest. It can also involve filing fees and, if discovered by the IRS, the payment of penalties.

The moral of this story is that unsuspecting plan sponsors could be hurt by a lack of knowledge of these requirements and their January 1 effective date. Financial professionals can help their plan sponsor clients by alerting them to these requirements before January 1, 2025.

Plan Coverage for Long-Term, Part-Time Employees

The original SECURE Act included a provision that required long-term, part-time employees be allowed to defer into 401(k) plans. However, it didn’t require matching contributions or other employer contributions for those employees. “Long-term” was defined as three consecutive years of employment. “Part-time” was defined as working at least 500 hours in each of those years.

SECURE 2.0 reduced the required years of part-time service to two years. That requirement is effective for 2025, meaning that employees who aren’t full time, but have at least 500 hours of service in each of the two preceding years must be allowed to defer in 2025.

In addition, and for the first time, SECURE 2.0 extends that requirement to private sector 403(b) plans.

There’s a concern that some plan sponsors aren’t aware of these changes and, as a result, may inadvertently disqualify their plans by failing to allow qualifying long-term, part-time employees to defer into their 401(k) and 403(b) plans. Financial professionals can help avoid that result by letting their plan sponsor clients know about the requirement before January 1.

Higher Catch-up Contributions

Beginning in 2025, the Internal Revenue Code allows for higher catch-up contributions by some older participants. More specifically, SECURE 2.0 increased the limits for catch-up deferrals to the greater of $10,000 or 50% more than the regular catch-up amount, but only for participants who are 60, 61, 62, or 63.

This provision can be helpful to older workers who haven’t saved enough for a financially secure retirement and who participate in deferral-based plans, such as 401(k) and 403(b) plans (including government sponsored plans). Again, financial professionals can help by making sure that their plan clients know about this new option.

Practical Considerations

In some cases, there are changes in SECURE 2.0 that were legally effective in earlier years, but may just now be practically available. That could have happened, for example, because of the need for significant technology changes at recordkeepers and payroll providers or because of the need for additional guidance from the IRS.

Two examples are: matching contributions for student loan payments and Roth treatment for plan sponsor contributions.

The provision allowing matching contributions for qualifying student loan payments was effective for both private sector and government plans in 2024 but has seen little adoption because of the need to IRS guidance and changes to recordkeeping systems. 

However, the IRS has now provided guidance on the implementation of these programs and the systems of many recordkeepers have been updated to be able to administer the matching contributions for student loan payments. This feature could be particularly valuable to plan sponsors who employ large numbers of college graduates, such as law and accounting firms, technology companies, and engineering and science-based companies.

The SECURE 2.0 provision that allows Roth treatment for fully vested contributions was effective for contributions made after the date of enactment, December 29, 2022. This new option is available to both private sector and government plans. However, the feature hasn’t been widely adopted due to the need for additional guidance from the IRS and the need for systems changes at payroll providers and recordkeepers. Fortunately, the IRS has now issued detailed guidance on the implementation of this optional feature and some providers developed compliant systems for tracking and reporting the contributions. This option could make sense for plan sponsors that employ significant numbers of young, highly-educated and compensated employees.

Financial professionals can help their plan sponsor clients by keeping them informed.

Concluding Thoughts
This article is a tale of problems created by effective dates that are early and those that are late.

For example, the deferred date for automatically enrolling employees may result in some plan sponsors inadvertently violating the qualification rules—because they lost track of them. On the other hand, the effective date for allowing Roth treatment of fully vested employer contributions was so early that service providers didn’t have time to make the adjustments needed to administer the provisions.

Financial professionals can help their plan sponsor clients by keeping them informed of these legal requirements and of the practical considerations in adopting the optional provisions, where they will benefit the covered workforce.