New Rules Support Retirement Readiness

The SECURE 2.0 Act is estimated to generate nearly $40 billion in retirement savings for new plan participants over the next 10 years. By 2025, employers who establish new retirement savings plans on or after December 29, 2022, must auto-enroll all eligible employees into the plan. Employees must be enrolled at a salary deferral rate between 3% and 10%, and the deferral will increase 1% annually until it reaches 10%. However, employees may change their deferral rate or decline participation in the plan.

Enrolling your employees in the retirement plan is an essential first step in helping them to build nest eggs. However, to encourage employees to stay the course with their investments, you must improve financial education and communication.

Employees face numerous distractions and competing priorities, including market volatility, inflation and financial commitments such as student loans. Stopping or postponing plan contributions or making uninformed investment choices can negatively impact their retirement savings goals. This also affects employers, as workers then continue to work well past retirement age.

If your plan currently features auto-enrollment and auto-escalation, there’s still an opportunity to review your organization’s strategies for increasing plan participation and develop a robust financial wellness program. Offering educational savings tools and providing forecasts of retirement income may encourage employees to continue building their savings.

New Provisions to Boost Savings

Effective January 1, 2024:

• New employer matching contributions on student loan payments — Employers that offer 401(k) plans, 403(b) plans, SIMPLE IRA plans and governmental 457(b) plans may provide a matching contribution based on a participant’s “qualified student loan payments.” This provision is intended to make it easier for employers to provide employer-matching contributions to employees who are paying off student loans in lieu of making retirement plan contributions. An employer can rely on employee certification of the student loan payments.
• Roth treatment of catch-up contributions — For individuals whose wages are more than $145,000 (indexed), catch-up contributions to 401(a), 403(b) and 457(b) plans must be made on a Roth (i.e., after-tax) basis. UPDATE AS OF 8/25/23: The IRS issued Notice 2023-62, providing eagerly anticipated relief in the form of a two-year administrative transition period, meaning that plan sponsors, recordkeepers and payroll providers now have until 2026 to get systems in place to administer this change that was scheduled to take effect in 2024.

Effective January 1, 2025:

• Increased catch-up contribution limits — For individuals 60 to 63 years old, catch-up contributions to retirement savings plans will be increased to the greater of $10,000 or 150% of the regular age 50 catch-up amount in 2024.
• Reduced period of service requirement for long-term part-time employees — For long-term part-time workers to be able to contribute to a qualified retirement savings plan, the required service period will be reduced from three to two years. The employee needs to have worked a minimum of 500 hours of service per year and be 21 years old by the end of the two-year period.

Additional Key Provisions That May Affect Your Retirement Program: