As we enter into the new year and a new administration in Washington, D.C., there are significant updates to employee benefit plans that take effect in 2025, driven by existing legislation such as the Employee Retirement Income Security Act of 1974 (ERISA) and the Setting Every Community Up for Retirement Enhancement Act of 2022 (SECURE Act 2.0).
Mandatory Automatic Enrollment for New Plans
Under the SECURE Act 2.0, starting January 1, 2025, newly established 401(k) and 403(b) plans adopted after December 29, 2022, must automatically enroll eligible employees. Initial deferral rates will range between 3% and 10% of compensation, with automatic contributions escalating annually by at least 1% until they reach a minimum of 10% (but no more than 15%, though capped at 10% until 2025). Employees may opt out of automatic enrollment or escalation at any time.
Exemptions to this requirement include:
- Plans established on or before December 29, 2022.
- Organizations less than three years old.
- Businesses with fewer than 10 employees.
- Church and governmental plans.
Increased Catch-Up Contributions
Introduced by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), catch-up contributions allow older workers to enhance their retirement savings. Before December 31, 2024, the catch-up contribution limit for 401(k), 403(b), and 457(b) plans was $7,500 (adjusted for inflation).
For taxable years beginning after December 31, 2024, participants aged 60 to 63 will be able to make catch-up contributions up to $11250 or 150% of the 2024 limit (adjusted for inflation post -2025).
For SIMPLE IRA plans, catch-up contributions, previously capped at $3,500, will depend on participants’ ages and company size. Contributions above regular deferrals in 2025 will range from $3,850 to $5,250.
Inclusion of Long-Term Part-Time Employees
The original SECURE Act mandated that part-time employees working at least 500 hours annually for three consecutive years and aged 21 or older be eligible for 401(k) plans. Employees would also earn vesting credits for each qualifying year.
The SECURE Act 2.0 reduces this eligibility period from three years to two for plan years starting after December 31, 2024. However, service prior to January 1, 2021, does not count toward eligibility or vesting. This rule also now applies to 403(b) plans under ERISA but excludes union and defined benefit plans.
Long-Term Care Premium Distributions
Plan participants will soon be allowed annual distributions of up to $2,500 to pay for qualified long-term care insurance premiums without incurring the 10% early withdrawal penalty. This optional provision for plan sponsors becomes effective for distributions made after December 29, 2025.
Lost and Found Database
To address the issue of missing retirement funds, SECURE 2.0 requires the Employee Benefits Security Administration to launch a database for locating lost retirement accounts by December 29, 2024. While participation is voluntary, concerns have been raised about the extent of information requested by the Department of Labor during database development.
Preparing for 2025
By staying ahead of these changes, plan sponsors can ensure compliance and smooth transitions. It’s essential to review and update plans proactively to align with these new requirements.
For more information about important changes that may impact your plan, please contact Melissa Shronce via email at melissa@dhw.cpa or 828.322.2070.