SECURE 2.0 Will Bring New Changes in 2025: Here’s What Business Owners Need to Know
By Don Hammond, CFP®, AIF®, MBA, Senior Vice President and Managing Partner, Merit Financial Advisors
Are you or your employees in danger of outliving your retirement? It’s a troubling prospect facing many Americans today. Recent analysis from Vanguard confirms an average 401(k) balance of $134,128 in 2024, with the median balance being $35,286. Shockingly, 28% of working adults have no retirement savings at all, according to a 2023 Federal Reserve study. Coupled with the increased cost of living and longer life spans, taking smart action now can certainly make a difference as older Americans look to wind down their careers.
Luckily, saving for retirement is getting easier for employees. Originally enacted in 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act is a wide-ranging piece of legislation aimed at helping individuals save for retirement and encouraging businesses to offer retirement plans. Passed in 2022, SECURE 2.0 adds additional provisions to address the shortfall in retirement savings, with several provisions going into effect on January 1, 2025. Here’s what business owners need to know about the current state of retirement savings and how to prepare for the year ahead.
The state of savings and support from Capitol Hill
When the Social Security Act was first passed in 1935, retired Americans over the age of 65 were promised a living wage to support them in their sunset years. However, the program has changed dramatically in the following decades. Additionally, since pensions have all but disappeared, today, employees must rely on consistent savings to meet their retirement goals. Naturally, Gen Y and Gen Z are more conditioned to stash money away than Baby Boomers, but savings rates haven’t increased enough to replace the income needed. Recent estimates from 2023 cite the average combined (employee contributions and employer match) savings rate at 11.7%, less than the recommended 12-15% of income to be on track for a successful retirement.
While Social Security will continue to be part of the retirement landscape moving forward, it will look a lot different moving forward. With the last significant changes to the program occurring 40 years ago and well documented funding issues on the horizon, imminent action from Congress is needed to ensure that benefits will not be reduced. Proposals include increasing the retirement benefit age, means testing which would reduce or eliminate benefits to those with higher income and/or increasing the Social Security payroll tax cap. These changes will likely impact younger generations the most.
Fortunately, there is bipartisan support for increased retirement saving measures. Both Democrats and Republicans have been proponents of additional measures to encourage retirement saving with slight nuances. Democrats have been more in favor of state mandates and nationalization of retirement plans or government thrift savings programs, while Republicans are more interested in private plans but with expanded access, tax credits, and other measures to incentivize small businesses to put plans in place.
Three major SECURE 2.0 changes starting in January
The new year will ring in three new retirement plan provisions that businesses should be aware of, all designed to increase retirement savings.
First, retirement plans created after December 29, 2022, are required to automatically enroll newly eligible employees at a minimum of 3%. Additionally, the plan must provide for automatic annual increases of 1% until the employee contribution rate is a minimum of 10%. Employees have the option to change their contribution rate or opt-out completely. This means employers must ensure their payroll systems are up to date; new hire information is communicated to recordkeepers, and employees receive the proper notices.
Next, prior to 2019, an employer-sponsored retirement plan could exclude part-time employees, but not anymore. SECURE 1.0 required that employees who worked between 500 and 1,000 hours in three consecutive years be allowed access to their company retirement plan. Effective January 1, 2025, eligibility has been updated to include employees who work between 500 and 1,000 hours over the last two consecutive years. The industries most affected will be those relying on part-time workers, like nursing homes and related medical fields, hospitality, and seasonal retail. Employers should review their plan document to ensure no plan amendments are needed to comply with this new provision. Additionally, employers will need to review and track the hours of their part-time employees to determine whether these employees are eligible to participate.
Finally, to help older savers increase their retirement savings, starting in 2025, the catch-up contribution limits for individuals ages of 60-63 will increase to $10,000 or 150% of the regular catch-up amount as indexed each year ($11,250 in 2025).
Three things business owners should do now to prepare for the new year
Review your plan. With over 90 provisions that impact retirement plans that take effect at various times, ensuring that your plan is compliant with SECURE 2.0 is an important first step. Your advisor can guide you on how SECURE 2.0 will affect your retirement plan and what immediate steps should be taken. Additionally, retirement plans are a necessary part of an employee benefits package, but a lot of business owners stop there because they don’t realize how powerful it can be for them, too. There are many ways to construct a retirement plan that supports both employees and business owners alike.
Consider your communications strategy. Educating employees on the benefits of saving for retirement and how their retirement plan can help them to be on track for their own successful retirement is key. From Roth vs. Pre-tax contributions to understanding the savings rates needed to be on track for a successful retirement, the more educated employees are about their retirement plan options and the benefits of planning ahead, the greater engagement they will have in the retirement plan. Consider offering a full day of office hours for an advisor to meet with employees; it’s a great way for employees to review their individual goals and ask questions in a relaxed setting. Work with your plan’s advisor and recordkeeper on creating an annual education strategy using their resources and materials to help participants.
Lastly, make sure your fiduciary house is in order. The Department of Labor continues to be active with enforcement of the rules around retirement plans. Plan sponsors have fiduciary responsibilities and ensuring your plan’s fiduciary house is in order can be overwhelming. Working with your plan’s advisor, creating an annual fiduciary checklist along with periodic meetings (at least annually) to review the plan’s investments, expenses and other requirements will help identify any issues in the plan’s operations. Not sure if your plan is ready for the new year? Contact Merit Financial Advisors today for a complimentary consultation.