SECURE 2.0 opportunities — Take advantage of 2024 and 2025 updates

newsletterPresident Biden signed the Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act into law in late 2022, but much of the wide-reaching retirement legislation is being phased in over time. There are some significant changes in 2024 and 2025 that may help nonprofit employers recruit and retain employees. Here’s what you need to know.

New for 2024

Several changes took effect January 1, 2024, including:

Matching for student loan repayments. Younger employees can sometimes miss out on their employers’ matching contributions to retirement plans because of their student loan obligations. SECURE 2.0 allows employees to receive matching contributions to retirement accounts based on the qualified student loan payments that they have made.

Nonprofits can make matching contributions to a 403(b) plan, 401(k) plan or SIMPLE IRA if contributions based on student loan payments are available to all match-eligible employees.

“Starter” 401(k)s. SECURE 2.0 establishes a new retirement plan known as a starter 401(k). This is a type of cash or deferred arrangement that you generally can offer as long as you don’t offer another qualified retirement plan. You’ll need to automatically enroll all employees at a deferral rate of at least 3%, but no more than 15%, of compensation. The maximum annual deferral is $6,000 (indexed for inflation) plus the annual catch-up contribution amount for participants over age 50.

You can enforce age and service requirements and employees can elect out of plan participation. Employees can elect to contribute at a different level, but employer contributions aren’t permitted.

Emergency funds. SECURE 2.0 contains multiple provisions permitting emergency access to retirement savings. For example, employers now can link an after-tax Emergency Savings Account to employees’ retirement accounts.

You can automatically enroll nonhighly compensated employees with a deferral rate of up to 3% of compensation but no more than $2,500 annually (indexed), or lower if you choose. Participants can make withdrawals tax- and penalty-free. You must allow at least one withdrawal per month, with no fee for the first four withdrawals each year.

The law also enables one annual penalty-free early withdrawal from a qualified retirement plan for “unforeseeable or immediate financial needs relating to personal or family emergency expenses.” Participants have three years to repay the early withdrawal, but no additional emergency withdrawals are allowed during the repayment period.

Roth 401(k) RMDs. Roth 401(k) plans traditionally have been subject to annual required minimum distributions (RMDs). As of the beginning of 2024, though, designated Roth 401(k) contributions aren’t subject to RMDs until the death of the participant.

New in 2025

Even more provisions kick in next year. For example, employers with 401(k) and 403(b) plans that were adopted after December 29, 2022, will be required to automatically enroll all eligible employees, with a deferral rate of at least 3% but not more than 10%. The rate will automatically increase by 1% per year, up to at least 10% and no more than 15%. Employers with 10 or fewer employees, church plans, and those that have been in business for fewer than three years are exempt from the automatic enrollment requirements.

In addition, the annual catch-up contribution limit for individuals age 60 to 63 will go up to $10,000 or 150% of the regular catch-up limit, whichever is greater. The percentage will be adjusted for inflation after 2025.

Finally, long-term part-time employees age 21 and older who work at least 500 hours per year for two consecutive years must be allowed to contribute to 401(k) and 403(b) plans. For 2024, the requirement was that part-time employees must log at least 500 hours for three consecutive years.

Don’t forget to update your documents

The numerous changes triggered by SECURE 2.0 likely mean you’ll need to amend your plan documents, if you haven’t already. You generally have until the end of 2025 to amend, but it’s never too early to get started.