As the new year approaches and the transition to the new administration in D.C. commences, change is inevitable. However, there are new employee benefit plan provisions taking effect in 2025 driven by existing laws such as the Employee Retirement Income Security Act of 1974 (ERISA) and the Setting Every Community Up for Retirement Enhancement Act of 2022 (SECURE 2.0). Here, we will review those changes and offer additional insight.
Mandatory automatic enrollment for new plans
SECURE 2.0 established new requirements for new 401(k) and 403(b) plans adopted after December 29, 2022. As of January 1, 2025, employers must automatically enroll eligible employees into these plans with an initial deferral percentage that is between 3% and 10% of compensation. Automatic contributions escalate by at least 1% per year up to a deferral rate of at least 10% but not more than 15% (10% until January 1, 2025). Participants can opt out of automatic enrollment or automatic escalation at any time.
The following may be exempt from the new requirements:
- Plans in effect on or before December 29, 2022.
- Organizations in existence for less than three years.
- Businesses with fewer than 10 employees.
- Church and governmental plans.
Catch-up contribution increases
The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) first introduced catch-up contribution provisions as a way to help older workers increase retirement savings. Under EGTRRA, plan sponsors could voluntarily amend their plans to allow participants aged 50 and older to contribute additional amounts to their 401(k), 403(b), and 457(b) plans. Prior to December 31, 2024, catch-up contributions to these plans were limited to $7,500, as indexed.
For taxable years beginning after December 31, 2024, those contribution limits change. Participants aged 60 to 63 may make additional contributions of either (i) $11,250 or (ii) 150% of their 2024 contribution limit, as indexed for inflation after 2025.
For SIMPLE IRA plans, before December 31, 2024, participants in SIMPLE IRA plans that allow catch-ups could contribute up to $3,500, as indexed. In 2025, such contributions rely on the participant’s age (50 to 59, or age 64 or older on December 31, 2025) and the company’s number of employees. Depending on these factors, a participant’s contributions above regular deferrals can total between $3,850 and $5,250.
Coverage of long-term part-time employees
The original SECURE Act required employers to include certain part-time employees in their 401(k) plans. To be eligible, the employee must have worked at least 500 hours per year for at least three consecutive years and must be at least 21 years old as of the end of that three-year period. The employee also would earn vesting credits for all years with at least 500 hours of service.
SECURE 2.0 reduces the three-year period to two years for plan years beginning after December 31, 2024. However, service performed before January 1, 2021, is disregarded for both eligibility and vesting purposes.
Although SECURE 2.0 extends this rule to apply to 403(b) plans that are subject to ERISA, the rule does not apply to union plans or defined benefit plans.
Distributions for certain long-term care premiums
Plan participants may receive distributions of up to $2,500 per year to pay for quality long-term care insurance without triggering the 10% early withdrawal penalty that might otherwise apply. This optional change for plan sponsors becomes effective for distributions made after December 29, 2025.
The lost and found database
Retrieval or management of retirement funds can be complicated when workers move from job to job. To help reunite participants and their missing retirement plans, SECURE 2.0 required the Employee Benefits Security Administration to provide a search tool or database of benefits by December 29, 2024. At this time, participation is voluntary, with some groups expressing concern about the breadth of information initially requested by the Department of Labor to populate the database.
Is your plan ready for 2025?
By staying informed and prepared, plan sponsors can navigate these changes effectively. Plan sponsors should proactively review and adjust their plans accordingly to ensure compliance with these new mandates.
If you have questions about the compliance of your plan or would like more detailed guidance, contact our Employee Benefit Plan Audit team for more assistance.