IRS Guidance Changes SECURE Act 2.0 Effective Dates of Provisions for Workplace Retirement Plans

Update: A provision of the SECURE Act 2.0 takes effect in 2025 that changes the eligibility requirements for long-time part-time employees to participate in a workplace retirement plan and new guidance by IRS impacts catch-up effective date.

Original article

With the signing into law of the omnibus spending bill that included SECURE Act 2.0 on Dec. 29, 2022, businesses and their employees can now capitalize on added incentives related to their retirement plans.

Originally, the Securing a Strong Retirement Act of 2022 (SECURE Act 2.0) was passed in March 2022 with an overwhelming bipartisan vote of 414-5 by the U.S. House of Representatives while two separate bills on retirement were debated by the Senate. Components of each bill eventually were folded into the omnibus bill.

SECURE Act 2.0 follows the initial phase by Congress to address the retirement crisis in the United States. Setting Every Community Up for Retirement Enhancement (SECURE) Act was signed into law Dec. 27, 2019.

SECURE 2.0 is an attempt to build on the initiatives already started to help a wide range of Americans achieve retirement security and financial wellbeing. Its provisions include:

Eligibility for Long-Time Part-Time Employees

On Jan. 1, 2025, a provision impacting eligibility takes effect that changes the number of years of service to two for long-time part-time employees (along with 500 hours of work in each year) to be able to participate in their employer’s workplace retirement plan. Under the original SECURE Act, as of Jan. 1, 2024, long-time part-time employees have three years of service to become eligible, in addition to the 500 hours of service in each of those years.

Eligibility Expansion for Small Businesses to Earn Tax Credit

As of 2023, eligible businesses with 50 or fewer employees can qualify for a credit equal to 100 percent of the administrative costs for establishing a workplace retirement plan. The original SECURE Act gave startup businesses with up to 100 employees a tax credit equal to 50% of administrative costs, capped annually at $5,000. Eligible businesses with 51 to 100 employees remain subject to the original SECURE Act provision.

A New Credit for Employer Contribution Costs

Also in 2023, eligible businesses with up to 100 employees might be entitled to a tax credit based on their employee matching or profit-sharing contributions. This credit, which caps at $1,000 per employee, phases down gradually over five (5) years and is subject to further reductions for employers with 51 to 100 employees.

Technical Correction for Small Businesses to Qualify for Startup Credit

If a business offers a retirement plan for the first time by joining a multiple employer plan (MEP) or a pooled employer plan (PEP), regardless of how long the MEP or PEP has existed, they should consult with their accounting professional to see if they are eligible for the credit.

Expansion of Auto-Enrollment

SECURE 2.0 requires automatic enrollment for new 401(k) or 403(b) plans beginning in 2025. The initial default rate must be between 3% and 10%, including annual auto-escalation of 1%, up to at least 10% but not more than 15%.

Automatic enrollment in a retirement plan is designed to make it easier for employees to participate. Employees who prefer not to participate can opt out. There is an exception to the requirement for small businesses with 10 or fewer employees, new businesses less than 3-years-old, churches, and governmental plans. To add even more convenience, businesses can integrate automatic enrollment with payroll.

Changes to Benefit a Multigenerational Workplace

Today’s workplace is more generationally diverse than ever. Older employees are working longer, and Millennials make up roughly one-third of the American workforce. SECURE Act 2.0 addresses these age groups.

For older employees, the law raised the required minimum distribution (RMD) age from 72 to 73, effective Jan. 1, 2023, and then to age 75 beginning in 2033. Participants who turned 72 in 2022 or earlier follow the old rules.

There are several new catch-up contribution provisions, including one for individuals who have earned $145,000 or more in the prior plan year. The IRS released guidance in August 2023 that implemented an administrative transition period of two years before the rules take effect, moving the effective date to Jan. 1, 2026. If an individual has met the salary threshold ($145,000) and is eligible for the catch-up within your company's 401(k) plan, they can only designate such catch-up contributions to a Roth IRA (after-tax basis).

Also, beginning in 2025 for individuals age 60 through 63, the catch-up amount would be increased to the greater of $10,000 or 50% more than the regular catch-up amount for an employer-sponsored 401(k) and 403(b).

Since today’s workforce includes more part-time workers, they will be eligible to contribute to an employer-sponsored retirement plan. The Act requires employers to allow long-term, part-time workers to defer to their 401(k) plans. 

The law also transforms the current Saver’s Credit that provides millions of low and middle-income individuals with an incentive to save for retirement each year to a Saver’s Match beginning in 2027. The Saver’s Match will be a federal matching contribution deposited to a taxpayer’s IRA or retirement plan.

Student Loan Payment Matching

Student loan debt, according to the Federal Reserve in 2021, impacts 45 million Americans whose combined debt for student loans is $1.75 trillion.

Starting in 2024, the law will allow employers to make matching contributions to an employee’s 401(k) per their plan provisions when an employee makes a student loan repayment, thus enabling the employee to pay off their student loan and save for retirement at the same time.

Paychex Can Help

SECURE Act 2.0 is more comprehensive than what is outlined above, but these are some of the key areas of interest that could impact businesses. Paychex Retirement Services can be utilized to help your business take advantage of implementing and managing a retirement plan. 

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