Where did 2024 go?! Hard to believe that we are closing in on 2025 and another round of SECURE 2.0 provisions is coming online. Knowing how the following three provisions influence plan design, administration, and costs can help you better serve your clients.
- The mandatory automatic enrollment feature will shake up how plans are designed in the future.
- The long-term, part-time employee change in 2024 gets a reduction in 2025.
- Participants in their early 60s get a chance to save more for the future.
Use this guidance to inform your clients of these upcoming provisions and how they may affect their plans. You are then in a better position to strategize on any required or discretionary administrative changes and coordinate participant communications.
Mandatory Automatic Enrollment Feature
The most significant provision effective in 2025 is the required inclusion of an automatic enrollment feature for 401(k) and 403(b) plans. The auto enroll feature is required unless:
- Plan was established (i.e., signed) on or before December 29, 2022;
- Employer normally employs no more than 10 employees;
- Employer in existence for fewer than three years; or
- Plan is a SIMPLE, governmental or church plan.
The mandatory auto enroll feature must have an initial deferral rate between 3% and 10% of pay with required annual escalation until the deferral rate reaches between 10% and 15% of pay. Most operational errors with auto enroll occur when implementing the escalation provisions. If you are looking to avoid those potential errors, consider setting the initial default deferral rate at 10%, which eliminates the annual escalation requirement.
As of this blog post release, we are still waiting on guidance for two significant items: defining a covered employee for the mandatory provisions and determining ERISA exemption for certain 403(b) plans.
“Covered Employee” Definition
We don’t yet have a clear definition of who is a “covered employee” subject to the mandatory auto enroll feature. It will most likely be one of two methods commencing on the first day of the plan year beginning in 2025:
- Any employee hired on or after that date; or
- Any employee who does not have an affirmative election on file as of that date.
To illustrate, an employer adopts a 401(k) plan in 2023 with a calendar year end. The 401(k) plan doesn’t meet any of the listed exceptions above, so mandatory auto enroll applies. Blendi is hired in 2023 and becomes a participant in 2024. He doesn’t complete a deferral election. Junior is hired in 2025 and will become a participant in 2026.
If method 1 is used to determine a “covered employee,” only Junior would get auto enroll notice before his entry date because Junior’s hire date was in 2025. On the other hand, if method 2 is used, both Junior and Blendi receive an auto enroll notice. Moreover, Blendi would have to receive his notice prior to 2025 for the auto enroll feature to begin in 2025. Junior would still get his notice before his entry date in 2026. Due to the potential timing of auto enroll notices, it is critical that we receive guidance soon if method 2 is used to define “covered employees.”
ERISA Exempt (or Deferral Only) 403(b) Plans
403(b) plans sponsored by private employers can be exempt from ERISA if the employer’s involvement is limited to certain specified activities. This is problematic for the upcoming mandatory auto enroll feature because of the employer involvement required to implement it. Presumably the employer needs to set the initial deferral rate and the escalation limit. In addition, funds deferred under the auto enroll feature must be invested in a qualified default investment alternative (QDIA) unless directed by the participant otherwise. It appears the employer must select the QDIA as well.
None of these employer activities related to mandatory auto enroll are included in the list of specified activities by the Department of Labor (DOL). Without guidance on these issues, the implementation of the mandatory auto enroll feature starting in 2025 would result in many previously-exempt 403(b) plans becoming subject to ERISA. In theory, ERISA-exempt 403(b) plans based on limited employer involvement would only exist if one of the mandatory auto enroll exceptions applied. This does not seem to be the intention, and hopefully DOL guidance will address this issue soon.
Increase in Small Account Balances
The addition of an auto enroll feature will likely result in more small account balances for terminated participants. It is critical that you help plan sponsors remove those small balances to reduce costs and allow the plan to operate efficiently. To illustrate, force-out distributions:
- Lower service provider fees, whether based on plan headcount or assets. For example, a service provider may charge $35/participant. In addition, increasing the plan’s average account balance may unlock better pricing from service providers.
- Reduce the probability of needing an audit for the Form 5500. An annual audit is required if the plan has over 100 account balances. Audits range from $7,000 to $15,000 each year.
- Decrease the risk of operational errors. Removing small account balances decreases the probability of an error occurring in administering those accounts, which can cost additional time and money.
Don’t forget to use auto rollover IRAs for balances of $1,000 or less to prevent fiduciary risk for the employer and unfavorable tax consequences to the employee.
Long-Term Part-Time Employees – Again
Starting in 2025, an individual who works at least 500 hours in two (was three for 2024) consecutive 12-month periods (i.e., LTPT employee) must be eligible to defer pay into the retirement plan. If you work with employers that use part-time or seasonal employees, this may require their attention.
Plan sponsors who must consider LTPT employees should evaluate the following factors:
- Verify whether the plan’s eligibility conditions affect LTPT employees. For example, using the elapsed time method or having no service requirement (just age) satisfy the LTPT employee requirements. Therefore, no change to the eligibility conditions is needed.
- Confirm that hours have been tracked since 2023 if the plan uses the counting hours method.
- Remember “once in, always in.” Any employees who meet the LTPT employee definition will continue to be eligible if their hours drop below 500 or they are terminated and re-hired.
- Consider using a separate eligibility computation period for LTPT employees as compared to full-time employees.
Similar to the mandatory auto enroll feature, the LTPT employee provisions may result in increased small balances for terminated participants. Plans that efficiently use force-out distributions and automatic rollover IRAs can lower plan costs and decrease the risk of errors.
Increased Catch-Up Contributions For Certain Ages
Catch-up contributions are additional elective deferrals that may be permitted for participants when they attain age 50. The maximum dollar limit is adjusted for inflation. In 2024, the limit is $7,500 for most plans and $3,500 for SIMPLE plans.
Beginning in 2025, an increased dollar limit applies for participants who have attained age 60 but not yet age 64. The increased limit is $11,250 for most plans and $5,250 for SIMPLE plans. This limit does not appear to be indexed for inflation based on the statutory language. Therefore, the increased limit should remain constant for years beyond 2025.
Although the change is beneficial for those individuals saving for the future, plan administrators or payroll systems (or both) will have to monitor this increase to ensure compliance. The limit will have to be adjusted at the beginning of the tax year in which the individual attains age 60 and then turned off at the beginning of the tax year in which that individual attains age 64. Without careful screening, this change in catch-up contributions could lead to operational errors.
Operational Change Without A Plan Amendment
Similar to the 2024 changes, the provisions effective in 2025 can be operational prior to amending the plan. A plan amendment isn’t required for any of the SECURE 2.0 changes until December 31, 2026, at the earliest. While employers can take advantage of certain provisions without worrying about the amendment process, they should be vigilant of required changes that need their attention.
It will also be interesting to see if the intended result – closing the coverage gap – is achieved through the mandatory automatic enrollment feature and LTPT employee eligibility. We recommend having a strategy in place to avoid issues resulting in lost time and money. We also recommend using force-out distributions to remove small balances which may offset increased plan costs and ease operational disruption.
Enjoy the rest of 2024, and wishing you all the best in 2025!
About the Author
Brian Furgala, Esq., CPC, QPA is Senior Director, Retirement Services Strategy for PenChecks, a leader in outsourced retirement plan distribution processing and Automatic Rollover/Missing Participant IRAs and related services. His broad experience as an ERISA attorney and senior executive for several leading retirement plan service providers gives him a unique perspective on the industry.
The views expressed in this article are those of the author and do not necessarily represent the views of PenChecks Trust®, its subsidiaries or affiliates.
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