Current Thinking

SECURE 2.0 Act Provisions to Consider in 2025

As 2025 approaches, it is an ideal time to review several SECURE 2.0 Act (“SECURE 2.0”) provisions that become effective soon or that plan sponsors may want to adopt. With the vast number of SECURE 2.0 provisions, it may be challenging to keep track of which ones apply when—and whether they are mandatory or optional. In this article, we will revisit some provisions that may have fallen off your radar, as well as provisions that are just starting to become available.  Applicability of certain provisions may vary depending on a number of factors, so be sure to consult with your retirement plan provider to determine which ones may apply to your plan(s).

Special Catch-Up Contributions

One of the more puzzling SECURE 2.0 provisions is this: participants in tax-qualified deferral plans (e.g., 401(k) and 403(b) plans) qualify for an increased catch-up contribution starting in 2025—but only if they attain age 60 – 63 during the course of the year. This special contribution increases the age 50 catch-up deferral by an additional 50 percent. Why Congress decided to limit the provision to such a narrow range of participants is hard to understand. But for eligible participants, this new option may be welcome news.

• For non-SIMPLE plans, the increased catch-up limit is $11,250 for 2025 (versus the standard $7,500). This amount will be indexed for cost-of-living adjustments (COLAs) each year.
• For SIMPLE IRA or SIMPLE 401(k) plans, a smaller catch-up applies. For 2025, the increased amount is $5,250 (versus the standard $3,500).

This provision may be considered optional, but only in a limited sense. Plans are not required to offer catch-up contributions at all, but nearly all plans do. While further guidance from the IRS would be welcome, if a plan offers catch-up contributions then it would seem likely that it would also permit this special catch-up contribution, especially because those who are able to make it are probably those with higher salaries and perhaps in leadership roles. Although payroll providers and other service providers will have to adjust some of their processes, this provision will almost certainly apply to most plans moving forward.

Automatic Enrollment Required for New (and Newer) Plans

Most employer-sponsored plans adopted on or after December 29, 2022, will have to contain an auto-enrollment feature starting with the 2025 plan year. So even if a plan were established for 2024 without this feature, it would have to be added for 2025. There are, however, several significant exceptions to this SECURE 2.0 Act provision.

• Businesses with 10 or fewer employees,
• Businesses that are less than three years old,
• Non-electing church plans and governmental plans, and
• SIMPLE 401(k) Plans

Affected plans—namely 401(k) and 403(b) plans—must contain an auto-enrollment provision that

• Starts eligible participants with at least a three percent (but no more than 10 percent) deferral rate,
• Increases the deferral rate by one percent each year until it reaches at least 10 percent (but no more than 15 percent), and
• Allows participants to opt out or choose a different contribution percentage at any time.

Many studies have noted the benefits of auto-enrollment provisions in retirement plans. Still, such provisions require some additional oversight. Plan sponsors, especially those who have adopted plans within the past two years, should be prepared to implement this feature, if required.

Long-Term, Part-Time Employees Get to Defer

Much has been written about this provision over that past several years, so let us recap. Although the SECURE Act of 2019 (“SECURE 1.0”) contained a similar provision related to long-term, part-time (LTPT) employees, the SECURE 2.0 Act shortened the period that LTPT employees would have to wait before being allowed to defer. This newer, shortened period applies to employees who have two consecutive plan years in which they work at least 500 hours and becomes effective for the 2025 plan year. For example, someone who worked at least 500 hours in 2023 and 2024 would be eligible to defer in 2025 under this provision. Although such workers will be eligible to defer their income into the retirement plan, This provision does not require the plan to offer employer contributions to LTPT employees.

Plan sponsors that employ part-time workers should make certain to track their hours carefully and to allow eligible employees to defer in 2025 and beyond. Some employers are also considering their plan provisions and plan design to determine whether it makes sense to amend the plan to include such part-time employees as full-fledged participants rather than as those who can merely defer.

Miscellaneous Items Worth Considering 

As you probably know, the sheer number of SECURE 2.0 provisions makes it hard to keep track of which ones apply, and when. In addition, some of them are mandatory (e.g., allowing long-term, part-time employees to defer), while others are optional (such as student loan repayments qualifying as deferrals for matching contribution purposes). Other provisions create important opportunities to improve plans for participants, but the practical details are still being ironed out. A prime example of this may be the option to allow participants to receive employer contributions as Roth contributions (covered below). While this feature has been available since SECURE 2.0’s enactment, implementing it has created obstacles for a variety of service providers.

Although the following items represent some of the more notable (or recently effective) provisions in the SECURE 2.0 Act, this list is far from comprehensive. It is intended, however, to remind plan sponsors of both operational and plan-design decisions that may affect your plan in various ways.

• Do you need to decide whether certain optional provisions would be good for you and your participants?
• Are you prepared to implement mandatory items?
• Have you documented which provisions apply to your plan and when they became effective?
• Do you have an opportunity to influence the actions that service providers will take to provide the services that you want?

Early distribution exceptions

For 2024, SECURE 2.0 added two new exceptions to the lineup of exceptions to the ten percent early distribution penalty. Added to the existing exceptions, such as for disability or for a series of substantially equal periodic payments, there are now numerous ways for participants and IRA owners to take distributions before age 59½ and to avoid the additional tax. Congress undoubtedly understands the tension it has created. On the one hand, providing more reasons to take early distributions without a penalty may encourage plan “leakage” (money leaving the retirement plan for purposes other than retirement). Participants may withdrawal retirement savings to meet, for example, an unforeseen emergency. Such decisions can adversely affect long-term savings accumulation. On the other hand, participants are more likely to contribute to their retirement accounts if they know that they can access their savings without penalty, if needed.

Emergency personal expense exception – Although the definition of such distributions was broad in the statute, IRS Notice 2024-55 seems to make it even more expansive. The notice clarifies that whether an emergency personal expense exists is a facts and circumstances test, and lists the following factors as relevant:

• Medical care,
• Accident or loss of property due to casualty,
• Imminent foreclosure or eviction from a primary residence,
• Funeral or burial costs,
• Auto repairs, or
• Any other necessary emergency personal expenses.

This last bullet seems to encompass an extraordinarily wide range of expenses that would apply under this exception.

Individuals may withdraw up to $1,000 per year under this new exception (or the excess account balance over $1,000 if lower), but they cannot take subsequent distributions for three calendar years or until the original $1,000 is repaid. Such repayment can be made within three years to the distributing plan or to another eligible plan, such as an IRA. Alternatively, individuals will become eligible for an additional emergency expense distribution if they defer an equivalent amount into the plan.

Domestic abuse victim exception – The other new penalty exception for 2024 allows participants to withdraw one-half of their vested balance (up to $10,000) per incident of domestic abuse of the participant, the participant’s child, or another family member living in the participant’s household. No payback is required for subsequent distributions, but recipients may pay back withdrawals within three years under rules like those that apply to emergency expense distribution repayments.

As with other exceptions to the early distribution penalty, these two newer provisions are optional for plan sponsors to adopt. Some may adopt the full range of account-access provisions for their participants, including early distributions (e.g., for disability or disasters), hardship distributions, and loans. Other plan sponsors may restrict account access to those events required by statute, such as attaining normal retirement age. However plan sponsors arrive at their choices, selecting these options (or not) can have a significant impact on participants and on plan administration. So plan sponsors should carefully consider and scrupulously document whatever decisions they make.

Student loan repayments as deferrals (for matching purposes)

Another SECURE 2.0 provision that became effective in 2024 allows plan sponsors to make matching contributions on account of participants’ qualified student loan payments (QSLPs). A QSLP is a repayment of a student loan for qualified higher education expenses of the employee, the employee’s spouse, or the employee’s dependent. The IRS released Notice 2024-63 to clarify the rules surrounding QSLPs. This notice applies for plan years beginning after December 31, 2024, but before that, plan sponsors may rely on a good faith, reasonable interpretation of Section 110 of SECURE 2.0.

This plan feature has generated many questions, due in large part to the many participants that it could affect. Here are a few of the requirements of a QSLP program.

• A plan must provide matching contributions on QSLPs and on regular deferrals at the same rate.
• QSLP matching contributions must be made only to participants otherwise eligible for deferral matching contributions.
• All participants who are eligible to receive deferral matches must be eligible to receive QSLP matches.
• Vesting must apply to QSLP matches in the same manner as for regular deferral matches.

• The participant making the QSLP must certify annually to the plan sponsor making the matching contribution that payment has been made on the loan. Self-certification is permissible. The certification must include
• the amount of the loan payment,
• the date of the payment,
• a statement that the payment was made by the participant,
• a statement that the loan repayment is a qualified education loan that was used to pay for qualified higher education expenses of the employee, the employee’s spouse or the employee’s dependent, and
• a statement that the loan was incurred by the participant.

As you might expect, this QSLP provision can add some complexity to plan operations. But the potential number of participants—and prospective new hires—that would benefit from this option is significant. And as service providers adopt procedures to more readily accommodate this feature, the operational hurdles should diminish.

Employer contributions as Roth contributions

One of the most talked-about SECURE 2.0 provisions has been the option for plan sponsors to allow participants to take both employer matching contributions and nonelective contributions as Roth contributions. This provision, which was effective immediately upon the SECURE 2.0 Act’s enactment, was intended to generate Treasury Department revenue by including such contributions in taxable income in the year deposited, as well as to jump-start retirement accounts with significant opportunities for tax-free growth. The excitement for this provision quickly devolved into . . . a waiting game. Without clear guidance from the IRS about how to implement this feature, few plan sponsors and service providers seemed inclined to venture into this uncharted territory.

In December 2023, the IRS published Notice 2024-2, an 81-page release that addressed a dozen SECURE 2.0 provisions, including Roth employer contributions. In short, Section L of Notice 2024-2 indicated that employer contributions treated as Roth contributions should be treated as if they were in-plan Roth rollovers for tax reporting purposes. This means that they would be reported as distributions on IRS Form 1099-R with a distribution code “G.” This guidance, although not as prompt as many had hoped, was at least relatively clear. (And in fairness to the IRS, it is much easier for Congress to pass legislation than it may be to address the many details required for implementation.)

Nearly a year after this guidance was released, the adoption rate for this provision seems modest, at best. The reasons may be varied. Plan sponsors may have plenty on their plates already and may not be pushing for this plan feature. Service providers may be slow to offer this provision, perhaps because of low demand or operational challenges. But as this provision becomes more mainstream, perhaps in 2025, plan sponsors should consider whether this is something they should offer when available.

Document SECURE 2.0 Act Changes

Now may be a good time to thoughtfully consider which optional SECURE 2.0 Act provisions you want to adopt for your plan. A conversation with your Pentegra team and advisor can help you derive the most benefits from your plan—for both you and your participants. For more information on the SECURE 2.0 Act and its effect on your plan, contact the Pentegra Solutions Center at 855-549-6689 or solutions@pentegra.com or visit Pentegra’s SECURE 2.0 Act resource page at www.pentegra.com.

The information, analyses and opinions set out herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity. Nothing herein constitutes or should be construed as a legal opinion or advice. You should consult your own attorney, accountant, financial or tax advisor or other planner or consultant with regard to your own situation or that of any entity which you represent or advise.