November 8, 2024
As we approach 2025, significant updates to retirement plans under the SECURE 2.0 Act of 2022 will come into effect. These changes aim to enhance retirement savings opportunities and improve financial security for workers across the United States. This article will cover four key updates related to mandatory automatic enrollment, emergency savings accounts, increased catch-up contributions for older employees, and student loan payment matching, all effective in 2025.
Automatic enrollment is a powerful tool for boosting retirement savings, and starting in 2025, it will become mandatory for most new 401(k) and 403(b) plans under the SECURE 2.0 Act. Employers will be required to automatically enroll employees at a minimum contribution rate of 3% of their salary, which will increase by 1% annually until reaching a cap between 10% and 15%. This automatic increase helps ensure that employees steadily build their retirement savings without requiring them to take action.
Exceptions to this rule include small businesses with fewer than 10 employees and new companies that have been in operation for less than three years, which are exempt from this requirement.
Source: SECURE 2.0 Act, Section 101: Automatic Enrollment
A major change under the SECURE 2.0 Act is the introduction of Emergency Savings Accounts (ESAs). Starting in 2025, employers can offer these accounts as part of their retirement plans, giving workers a way to save for short-term emergencies while contributing to their long-term retirement. Employees can save up to $2,500 in these accounts, and any withdrawals made from the ESA are penalty-free, making it easier for workers to manage unexpected expenses without impacting their retirement savings.
This provision offers a significant advantage by addressing a gap in financial preparedness, as many employees struggle to build emergency funds while also saving for retirement.
Source: SECURE 2.0 Act, Section 127: Emergency Savings Accounts
Catch-up contributions, which allow older workers to contribute more to their retirement accounts, will see a significant boost starting in 2025. Under the new rules, workers aged 60 to 63 will be able to contribute the greater of $10,000 or 150% of the standard catch-up contribution limit. This change acknowledges that many individuals may not have saved enough for retirement in their early years and gives them an opportunity to accelerate their savings in the years leading up to retirement.
In addition, high-income earners making more than $145,000 will need to make their catch-up contributions as Roth (post-tax) contributions, which could impact the taxation strategy for some workers.
Source: SECURE 2.0 Act, Section 109: Catch-Up Contributions
A particularly innovative provision in the SECURE 2.0 Act is the ability for employers to match student loan payments with contributions to an employee’s retirement plan. Starting in 2025, employees who are focusing on paying down their student loans can still receive employer matching contributions to their retirement accounts, even if they are not currently contributing to the plan themselves. This ensures that workers are not penalized for prioritizing debt repayment over retirement savings.
This provision is designed to help younger workers, many of whom struggle with balancing student loan payments and retirement savings early in their careers.
Source: SECURE 2.0 Act, Section 110: Student Loan Matching Contributions
The SECURE 2.0 Act introduces a variety of reforms aimed at improving retirement outcomes for employees across the U.S. Whether it's through automatic enrollment, emergency savings, enhanced catch-up contributions, or matching student loan payments, these changes offer more flexibility and opportunities for workers to prepare for retirement while navigating other financial priorities. Employers should begin preparing now to implement these provisions, ensuring compliance and maximizing the benefits for their workforce.
For a full breakdown of these changes, you can review the SECURE 2.0 Act of 2022 on Congress.gov. (https://www.congress.gov/bill/117th-congress/house-bill/2954/text)
For additional guidance about this topic please contact us today. Larson and Company has developed a suite of services specifically to serve the needs of companies of all sizes in a wide range of industries.