Best Practices for ERISA Plan Administrators
Significant updates to retirement plan rules under SECURE 2.0 are set to take effect in 2025. These changes aim to enhance retirement savings while streamlining plan administration. Here’s what plan sponsors and participants need to know to stay ahead of these important updates.
Mandatory Automatic Enrollment
The most notable change involves mandatory automatic enrollment for 401(k) and 403(b) plans. Unless exempt, plans must automatically enroll eligible employees with a deferral rate between 3% and 10%, increasing annually up to 15%.
Exemptions apply to:
- Plans established before December 29, 2022
- Employers with fewer than 10 employees
- Certain government and church-sponsored plans
The IRS is expected to provide additional guidance on defining “covered employees”, ensuring employers know exactly who must be enrolled.
Long-Term, Part-Time Employee Eligibility
Starting in 2025, employers must allow long-term, part-time employees to participate in their retirement plans. This applies to employees working at least 500 hours annually for two consecutive years.
Employers should ensure they’ve been tracking employee hours since 2023 to determine eligibility. Those who meet the criteria by 2025 must be offered plan deferrals, creating new savings opportunities for part-time workers.
Increased Catch-Up Contributions
Participants aged 60 to 63 will see catch-up contribution limits rise significantly:
- $11,250 for most 401(k) and 403(b) plans
- $5,250 for SIMPLE plans
These increased limits provide older workers nearing retirement with the opportunity to maximize their savings during crucial pre-retirement years.
Managing Small Account Balances
With these changes, small account balances are expected to increase. To reduce administrative costs and minimize potential errors, plan sponsors should consider force-out distributions and auto rollover IRAs. These features automatically transfer small balances into rollover IRAs when participants leave the company, simplifying account management and reducing administrative overhead.
The SECURE 2.0 changes coming in 2025 will impact plan sponsors and participants alike. Automatic enrollment, expanded eligibility for part-time employees, higher catch-up contributions, and account management enhancements will reshape how retirement plans operate.
