The SECURE 2.0 Act of 2022 (the “SECURE 2.0”) made significant changes to retirement plans and how they operate. Many of the changes have already been implemented by service providers, but some sponsors will need to plan for changes that will be effective in 2025. This alert outlines some of those changes.
Long Term, Part-Time Employees. Under SECURE 2.0, 401(k) plans and 403(b) plans subject to ERISA are required to allow long-term, part-time employees (“LTPT employees”) to make salary deferral contributions. LTPT employees are non-collectively bargained employees who are credited with at least 500 hours of service in two consecutive 12-month periods, excluding 12-month periods beginning before 2023, and have met the plan’s age requirement. Employees who meet these requirements may enter a 401(k) plan or 403(b) plan as early as January 1, 2025, for calendar year plans. The plan’s existing provisions for measuring 12-month periods for eligibility and for determining entry dates apply when determining eligibility and entry dates for LTPT employees.
LTPT employees do not have to receive any employer contributions, including safe harbor contributions, unless they otherwise satisfy the plan’s eligibility requirements for such contributions. If they are allocated employer contributions as LTPT employees, they must be credited with a year of vesting service for each year in which they complete at least 500 hours of service even if the plan requires 1,000 hours of service for other employees.
LTPT employees do not have to be included in coverage and nondiscrimination testing or for purposes of the top-heavy requirements. Please refer to our prior alerts dated October 21, 2024, and November 1, 2023, for more information.
Enhanced Catch-Up Contributions for Certain Ages. Effective for taxable years beginning on or after January 1, 2025, plans that provide for catch-up contributions, which are participant deferrals in excess of the applicable limit ($23,500 for 2025), may permit participants who will attain age 60-63 before the end of a taxable year to make enhanced catch-up contributions. For 2025, the regular catch-up limit is $7,500, and the enhanced catch-up limit is $11,250 (150% of the regular catch-up limit).
A further SECURE 2.0 change also applies to catch-up contributions. Effective for taxable years beginning in 2026 (unless extended), catch-up contributions made to 401(k) plans, 403(b) plans and 457(b) governmental plans by participants whose compensation exceeded $145,000 (as indexed) in the prior year must be made on a Roth (post-tax) basis. One advantage of Roth deferrals is that a participant who has attained age 59-1/2 and who has completed five taxable years of participation, beginning with the first taxable year for which Roth deferrals were made, can receive a distribution of Roth amounts entirely free of taxes on the earnings. Thus, it may benefit some employees to begin making Roth deferrals sooner than 2026 to start the five-year clock.
Yet another benefit under SECURE 2.0 is that, starting in 2024, Roth assets in a participant’s account are excluded from the calculation of required minimum distributions when the participant attains the applicable age to begin receiving distributions from the plan. This will allow an older participant with Roth assets to continue to enjoy tax-free earnings for a longer period.
Automatic Portability of Small-Sum Distributions. A plan can provide for cashouts of small balances (the cashout limit increased from $5,000 to $7,000 in 2024) when participants terminate employment and do not elect to receive payment of their account balances. If the cashout amount does not exceed $1,000, payment can be made to the participant, but if the cashout amount exceeds $1,000, it must be rolled over to an individual retirement account. Auto-portability involves the automatic rollover of that default IRA into the participant’s new employer’s retirement plan unless the participant elects otherwise. SECURE 2.0 provides a prohibited transaction exemption for the fees service providers collect for providing automatic portability services.
Many service providers have formed a consortium to facilitate automatic portability services; employers generally have to elect to participate in this program. One drawback of automatic portability is that Roth IRA assets currently cannot be rolled over to a qualified retirement plan, so any portion of the IRA that constitutes Roth assets will remain in the IRA.
Plans must be operated in compliance with the required changes as they become effective, but the IRS has extended the deadline to adopt an amendment reflecting these changes to the end of the 2026 plan year for many employers.
We will continue to provide information and explain actions plan sponsors may need to take to implement the changes made by SECURE 2.0 as they become effective and as the IRS releases regulations and other guidance. If you have any questions or concerns about how the new requirements will affect your plan, please feel free to contact us for assistance.
