Secure Act 2.0 and 401K Enrollment

There’s been an update to the original SECURE Act passed in 2019. The original SECURE Act governed how to contribute and withdraw from your IRAs and employer-sponsored retirement accounts.

The SECURE Act 2.0 passed at the end of 2022 and created many changes, especially those that affect employer-sponsored 401K accounts.

Of utmost importance are the requirements for new plans that must have automatic enrollment and automatic escalation starting on December 31, 2024. 

Why the changes?

Congress strives to make retirement savings more achievable for more Americans. Right now, just about half of Americans have money saved for retirement, but the SECURE Act 2.0 is meant to change that.

This includes changes for part-time employees who will now be eligible for a company’s 401K after working at the company for two years with at least 500 service hours.

For now, let’s focus on the changes in 401K requirements.

Secure Act 2.0 401K Requirements

New plans that begin as of December 29, 2022, or after, must meet specific requirements, including the following:

Automatic Enrollment

All plans must have an automatic enrollment option. This option must automatically enroll employees in the plan with at least a 3% contribution but no more than 10% for the first year. 

Automatic Escalation

All plans must also have an automatic escalation feature that automatically increases the amount an employee contributes by 1% annually until the contribution reaches 10%, with a maximum of 15%. 

Allowed Withdrawals

Employees must also be able to withdraw funds that were automatically contributed within 90 days of contribution. This includes any earnings the contributions had. These withdrawals will not be subject to the 10% early withdrawal penalty. 

Automatic Transfers

The new plan also enables employers to automatically transfer 401K accounts with low balances to an employee’s new employer when they leave the company. This reduces the risk of employees cashing out their 401K and not saving for retirement because they figure the low balance won’t mean much.

Exceptions to the Plan

Not all 401K plans will be subject to the requirements. First, any plans created before December 29, 2022, are exempt. Also, any plans for the following types of companies are exempt:

• Churches
• Government plans
• SIMPLE 401K
• Some small businesses
• During the first three years a business exists

Also, the rule doesn’t apply until a business has more than ten employees for at least one taxable year.

Final Thoughts

Companies must offer a 401K option for their employees with automatic enrollment starting in December of 2024. This should help more people save for retirement because it’s automatic. But of course, there’s an option to opt out, but you must exercise that option to not have your money saved.

Saving for retirement early is the key to having enough for your golden years. Saving three percent of your income and getting an employer match is like getting free money, setting you up for retirement early. 

If you have any questions about Secure Act 2.0 and how it affects you, contact the tax experts at Murtha and Murtha CPAs today.