Key SECURE 2.0 Act Updates for Defined Contribution Retirement Plans
Updated 401(k) and 403(b) Requirements for Long-Term Part-Time Employees. Starting in 2025, 401(k) and 403(b) retirement plans must offer the plan’s salary deferral feature to long-term part-time employees who are at least age 21 and have two consecutive years of service where they completed at least 500 hours of service. Originally, in 2021, this requirement applied only to 401(k) plans, but did not apply to collectively bargained plans or 403(b) plans and required three consecutive years of 500 (or more) hours of service. In 2025, the requirement is being extended to 403(b) plans with a salary deferral feature and the category of long-term part-time employee has now expanded by reducing the number of years of service.
New 401(k) and 403(b) Plan – Automatic Enrollment Requirements. For employers who established a 401(k) or 403(b) plan after December 29, 2022, those new plans will be required to include an eligible automatic contribution arrangement (“EACA”) beginning in 2025. Unless an employee opts out, the employee’s initial contribution should be at least 3% but no more than 10% of the employee’s eligible compensation. The default contribution rate must increase by 1% in succeeding plan years up to a cap of at least but no more than 15% of the participant’s eligible compensation. New plans subject to this rule must also follow other notice and permissible withdrawal rules that apply to EACAs.
Optional Increase for Catch-Up Contribution Limits. Starting in 2025, 401(k) and 403(b) retirement plans are allowed to increase the catch-up contribution limit for participants ages 60-63. For 2025, this optional higher catch-up contribution limit is $11,250 for participants ages 60-63 (if elected). If the optional higher catch-up limit is elected for participants ages 60-63, the lower catch-up contribution limit ($7,500 for 2025) would continue to apply for participants ages 50-59 and age 64 and over. When determining the annual catch-up contribution limit for a retirement plan participant, the participant’s age for the entire year should be determined based on the participant’s age on 12/31 of the applicable year. For example, a participant should not be permitted to contribute the higher catch-up contribution amount in the year the participant turns 64.
Prepare for Roth Treatment for High Earner Catch-Up Contributions. As noted in our prior article, the SECURE 2.0 Act will require 401(k) and 403(b) plans to treat the catch-up contribution of high earners as Roth contributions. The effective date of this requirement has been extended to 2026. To prepare for this change, plans fiduciaries should review and consider updating contribution documentation in 2025 before this requirement goes into effect in 2026.