SECURE Act 2.0 Eligibility Changes: From a Financial Advisor
Get ready!! Several new 401(k) provisions from the SECURE Act 2.0 kicked in on January 1, 2025. Here are two of them and what they mean for your retirement.
Automatic Enrollment
Newly established 401(k) and 403(b) plans are now generally required to include automatic enrollment features. However, this mandate applies only to plans created on or after December 29, 2022, when SECURE 2.0 was enacted. Exemptions include plans established before this date, those sponsored by small employers with 10 or fewer employees, businesses less than three years old, church and government plans, and SIMPLE plans. Existing plans can still voluntarily adopt automatic enrollment if they choose.
Automatic enrollment means employees join the retirement plan automatically. They must make elective deferrals unless they choose to opt out.
Employers set the default contribution rate. This rate must be at least 3% and no more than 10% of an employee's pay in the first year. After that, the contribution rate must increase by 1% annually until it falls between 10% and 15% of pay.
Studies have shown that automatic enrollment significantly increases participation in retirement plans. Some critics say that employees might give more than they can afford. This happens because they do not know they can opt out.
Expanded Eligibility for Part-Time Employees
Previously, 401(k) plans could exclude part-time workers who didn’t meet the 1,000-hour annual service requirement or were under age 21. This prevented many long-term part-time employees from participating in these plans.
The original SECURE Act addressed this issue by requiring plans to allow employees who worked at least 500 hours annually for three consecutive years and were 21 or older by the end of that period to contribute elective deferrals. For part-time employees hired in 2021 or earlier, this rule took effect on January 1, 2024.
SECURE 2.0 further shortens the consecutive service period from three years to two, though it excludes service before 2023. As a result, many part-time workers hired in 2023 or earlier who weren’t previously eligible will be able to start contributing by January 1, 2025.
Employers are permitted to offer more generous eligibility rules if they choose. Additionally, the original 1,000-hour rule still applies if it allows earlier participation than the newer provisions. Note that these part-time eligibility changes apply only to elective deferrals, not employer contributions.
Bottom Line
SECURE 2.0 introduces meaningful updates that aim to expand access to retirement savings for more employees while encouraging higher participation rates through automatic enrollment. By understanding these changes, including the rules for part-time employees and the requirements for new plans, employers can create more inclusive and effective retirement benefits. Employees, in turn, can take advantage of these opportunities to build a stronger financial future.
Whether you are an employer or an employee, it is important to stay informed about these rules. This knowledge helps you navigate the changing world of retirement planning.
Sources:
https://irahelp.com/slottreport/new-401k-provisions-that-become-effective-in-2025/
Disclosures:
This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.
This material is provided as a courtesy and for educational purposes only.
These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.
