Catch-Up Contribution Increases for Older Workers

Another key provision impacting both individuals and plan sponsors is the increase in catch-up contributions.

For Individuals: In 2025, individuals aged 60-63 will be allowed to make larger catch-up contributions to their 401(k) and 403(b) plans. The catch-up limit for these participants will increase to the greater of $10,000 or 50% more than the regular catch-up amount for individuals over age 50. This change allows older workers who are closer to retirement to save more and potentially make up for any missed contributions earlier in their careers.
For Plan Sponsors: Plan sponsors will need to ensure that their systems are updated to accommodate these higher catch-up contributions and communicate these changes to employees who may benefit.

Emergency Savings Accounts Linked to Retirement Plans

The SECURE 2.0 Act also provides a new provision allowing plan sponsors to establish emergency savings accounts within 401(k) and 403(b) plans, effective in 2025.

For Individuals: These accounts can be used for short-term, emergency expenses, and employees will be able to contribute up to $2,500 annually into these accounts on a Roth basis. The funds in these accounts can be withdrawn at any time without penalty, making them a flexible option for employees to access funds when needed.
For Plan Sponsors: For plan sponsors, this provision requires changes to plan documents and administrative processes. You’ll need to decide whether or not to offer these accounts and develop clear communications to employees about how to contribute, withdraw, and use the emergency savings accounts.

Expanded Roth Options for Employer Contributions

In 2025, SECURE 2.0 expands the ability for employees to make Roth contributions to their 401(k) and 403(b) plans.

For Individuals: Under this provision, employers will be able to offer employees the option to treat employer matching and profit-sharing contributions as Roth contributions, rather than traditional pre-tax contributions. This means that employees will pay taxes on employer contributions at the time they are made, but their future withdrawals will be tax-free, similar to Roth employee contributions.
For Plan Sponsors: Plan sponsors will need to update plan documents, work with their plan administrators to ensure that these Roth contributions are properly set up, and ensure that employees are well-informed about the pros and cons of making Roth contributions.

Reduction in the RMD Age to 73

While not a new provision for 2025 (it took effect in 2023), the SECURE 2.0 Act gradually increased the age at which individuals must begin taking required minimum distributions (RMDs) from their retirement accounts.

For Individuals: In 2025, the RMD age is set to be 73, which offers individuals more time to allow their retirement savings to grow before withdrawing funds. This will provide greater flexibility in retirement planning, and plan sponsors should ensure that their systems are aligned with the updated RMD rules.

Action Steps for Individuals

For employees, SECURE 2.0 presents opportunities to save more for retirement, particularly for those nearing retirement age. Here are some key provisions that might be applicable to you:

• Take advantage of the increased catch-up contribution limits if you’re aged 60-63.
• Consider the benefits of Roth employer contributions if your plan offers them, as they could lead to significant tax advantages in retirement.
• If your employer offers emergency savings accounts, this could be a valuable way to set aside funds for unexpected expenses without worrying about early withdrawal penalties.
• Stay informed about your plan’s updates and communicate with your HR or benefits department to ensure you’re taking full advantage of the new provisions.

Action Steps for Plan Sponsors

For plan sponsors, SECURE 2.0 brings numerous changes that will require administrative adjustments, from updating plan documents to revising communication strategies and ensuring systems can handle the new requirements. Here are some action items for plan sponsors to consider before 2025:

• If your plan is new – review your plan’s design to ensure it complies with the automatic enrollment and escalation provisions.
• Update plan documents to reflect new catch-up contribution limits, Roth contribution options, and emergency savings accounts.
• Communicate the changes clearly to your employees, especially regarding their ability to opt in or out of automatic enrollment and changes to catch-up contribution limits.
• Coordinate with your plan recordkeeper to ensure your plan systems are ready for the increased flexibility in Roth contributions and emergency savings.

Conclusion

SECURE 2.0 will bring significant changes that will impact both individual retirement savers and plan sponsors. By understanding and preparing for these changes now, you can ensure that your retirement savings strategy aligns with the new rules and maximize the benefits that SECURE 2.0 offers. Plan sponsors should take the time to review their plans and update their documents, while individuals should stay informed and adjust their retirement savings strategies to take full advantage of the new opportunities.

If you have questions about how SECURE 2.0 will affect your plan, don’t hesitate to reach out to your HBE trusted advisor or plan administrator for further guidance.