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The Secure 2.0 Act of 2022 had three big changes to 401(k) plans that go into effect this year, 2025. These changes are:
- Automatic enrollments for new employees
- Inclusion of Long-Term Part-Time Employees (LTPT)
- Increase in the "catch-up" contributions
Gary Logan
Wes Shannon
These changes are very important to know for small employers with existing 401(k) plans and those considering starting a 401(k) plan. Also, if you are a part-time employee or an employee over the age of 50, these changes will affect you.
401(k) retirement plans are employer sponsored, qualified retirement plans that are available to employees. The employee can elect to have an amount or percentage of their pay deducted either before or after taxes — Roth 401(k) — and invested in a retirement account with the plan. In addition to the employees’ contributions the employer may offer a contribution as a match to what the employee puts in. A standard match is usually a dollar for dollar on contributions of 3% or less of pay plus fifty cents on the dollar for the percentage of pay above 3% up to 5% of pay. Any contribution above 5% of pay would not be matched by the employer in this example.
Traditionally, the employee had to elect to participate and the opportunity to do so was offered usually sometime within or upon the completion of one year since the hiring date. The new rules require company plans to automatically enroll all employees if they do not elect to enroll or elect to opt out of the plan. The law requires the automatic enrollment to be between 3% and 10% of the employee’s pay. If the automatic enrollment is less than 10% it is required to automatically increase 1% per year until the contributions are 10% of pay.
If a business already has a 401(k) plan and has more than 10 employees, they must amend their current plan to start automatic enrollments of all employees. The employees may still request to opt out, but they must initiate that process. Employers starting a new 401(k) will have automatic enrollment as a part of the plan.
Congress passed this law in order to to drive more people into 401(k) plans and encourage greater retirement savings.
The second new rule is to include any employees who have worked at least 500 hours per year for at least three years. These employees are now labeled “Long-term Part-time (LTPT) employees. Previously, people who only worked 500 hours in a year were not eligible to join the plan. This, again, is an effort to get more people access to plans for retirement savings. Old plans will have to be amended, and new plans will have this as a rule to the plan.
The last big change is in the “catch-up” provisions for older employees. For the year 2025 employees may contribute up to $23,500 per year to their 401(k) plans. For employees who are over 50 and under 60 years of age they get to increase their contribution maximum by $7,500 to a total of $31,000. Employees aged 60, 61,62, and 63 can increase their maximum $11,250 to a total of $34,750. Employees aged 64 or more go back to a maximum contribution of $31,000.
Again, Congress is trying to get people to accumulate more retirement benefits. Usually by age 50, most workers have the kids out of the house and are experiencing more available discretionary cash and can use that extra money to “catch-up” on their retirement. Also, most workers are making the most money and are their most productive age between 50 and retirement. This increase in contribution limits is a very good thing.
Whether you are a business owner or an employee, these new rules for 2025 will affect you and, for the most part, are for the better of society.
If you run a business, having the services of a Certified Financial Planner™ to advise you on these changes and how to amend your plan can be very beneficial. Remember, CFP®s know their business as well as you do yours. As an employee working with a CFP® on a comprehensive financial plan will help you navigate and use these changes for your best advantage.
Wes Shannon CFP® is a Certified Financial Planning Professional for Brazos Wealth Advisors in Fort Worth.