Preparing for Next Round of SECURE 2.0 Provisions

Another round of SECURE 2.0 Act of 2022 provisions are set to take effect at the start of the new year.

Many plan advisers have likely already gotten their clients ready for the changes. But there will be millions of businesses around the country facing yet another round of plan administration changes, including a major mandate for new plans, as they start the new year.

“The truth is that there will be some level of employer headaches, but it’s all for the benefit of the employee and their savings, which his great,” says Doug Sabella, CEO and co-founder of Payroll Integrations, which connects payroll systems to employee benefit plans, including defined contribution savings. “It’s certainly something we’ve been going out there talking about a lot with clients and potential clients, and will keep doing into 2025.”

Mandatory Automatic Enrollment Features

Starting in 2025, new 401(k) and 403(b) plans established after December 29, 2022, must automatically enroll all eligible employees at a default deferral rate of between 3% and 10% of their salary. Businesses with 10 or fewer employees are exempt from the mandate, as well as businesses which have been operating for less than three years.

The mandate is one of the most anticipated changes brought by SECURE 2.0, with the potential to add millions of participants to the DC system.

Plans should already be prepared for that implementation, but the reality is that many small businesses may not have it set yet, says Eric Droblyen, president and CEO of Employee Fiduciary, a small and medium-sized business 401(k) provider. Many small businesses with high or near-full participant rates in their plan may be reluctant to make changes.

“Our message to employers has been that it’s something you have to do, and it’s not that big of a deal,” Droblyen says. “We want to make sure people are compliant, because if you get audited, the fines can get steep.”

Sabella, of Payroll Integrations, notes that for businesses with no retirement plan connected to payroll, it may be cumbersome to manage auto-enrollment themselves.

“Every time you hire an employee, you are tasked with managing that enrollment,” he says. “Then, a few weeks later, the employee may decide to change their deferral rate, which means another step. Then you’ll get another employee, and on and on.”

In time, both agreed that the auto-enrollment standard will become routine, but next year’s initial phase-in will likely result in some growing pains.

Long-Term, Part-Time Employee Changes

Beginning in 2025, employers sponsoring 401(k) plans and 403(b) plans governed by the Employee Retirement Income Security Act must permit employees aged at least 21 who have worked between 500 and 1,000 hours for two consecutive years to participate in the workplace plan for elective deferrals.

That is a change from a three-consecutive-year requirement and will certainly add more plan administration for employers with hourly, part-time employees. In addition, similar to the auto-enrollment feature, more people in the plan may also mean more small balances left in the plan by terminated participants, which will require further administrative action, notes Sabella.

Droblyen, of Employee Fiduciary, says many businesses already “hate administrating hours-based plans,” and this will only add to those challenges. When possible, he advocates for his clients to move to an “elapsed time method” system, by which an employer calculates the total length of time someone has been employed, rather than the hour count.

“We’ve been coaching people to do this just to get rid of the hours requirement,” Droblyen says. “It’s not a hard conversation to have … so we say, ‘Make life easier on yourself and have one less thing to worry about.’”

“In the case of someone who is managing this by hand, it is difficult to track,” Sabella says. “Most people aren’t building Excel models to track hours.”

When a business can integrate with payroll, it is possible to have employees hit an “eligible” mark when they reach the two-year mark and meet the hours criteria. Their accounts are then fed directly to the 401(k) provider for potential salary deferral.

Increased Catch-Up Contributions for Certain Ages 

Catch-up contributions offer older workers a chance to “catch up” with savings they may not have made into their retirement plan when younger. In 2025, SECURE 2.0 raises the catch-up limit for employees aged 60 through 63 to $11,250 from the current $7,500 for most retirement plans, and $5,250 for SIMPLE plans.

While this is a potential tax-advantaged boon for workers close to retirement age, it is another administrative task for businesses. In this case, the limit will have to be adjusted at the beginning of the tax year when an individual hits 60; likewise, it will need to be turned off when an individual hits 64.

Droblyen says this should not be a major issue for most plans, as they are used to setting catch-up limits. But smaller businesses will need to ensure setup and compliance with the rule.

Automatic Portability of Small-Sum Distributions

Another important development in 2025 is allowance for the automatic transfer of retirement savings from a default individual retirement account to a new employer’s retirement plan. The optional provision is intended to make it easier for employees to keep their savings in an employer-based plan when they switch jobs, with the potential to reduce cash-outs from the tax-advantaged system.

The cash-out limit for small balances in a plan was increased in 2024 to $7,000 from $5,000 when a participant is terminated and does not elect to receive payment of their account balance. If that cash-out exceeds $1,000, it must automatically be sent to an IRA

With the new provision, however, those funds can then be automatically ported from the IRA to a new employer plan if that person gets a new job offering a savings plan. Roth IRA assets cannot currently be rolled over to a qualified retirement plan, so if there are Roth assets, they would remain in an IRA.

In addition to the auto-portability allowance, SECURE 2.0 provides for a prohibited transaction exemption for the fees that service providers collect for providing automatic portability services.

For this provision, the role of the employer will be to sign up to offer auto-portability between retirement plans. But not all recordkeepers are yet able to accommodate the request. As of now, six of the country’s largest recordkeepers are set to offer auto-portability, though only three are active currently.

The Portability Services Network, run by the Retirement Clearinghouse LLC, reported earlier this month that there are about 15,000 retirement plans currently able to offer the service, covering about 5 million participants.

Sabella, of Payroll Integrations, says that once the kinks are worked out, the new provisions should have a positive impact for retirement savings. Meanwhile, he says, the question is: “What’s next to come down the legislative pipeline? There’s likely to be more changes for employers to address in coming years.”