SECURE Act 2.0: 2025 Changes for Small Business 401(k) Plans

The SECURE 2.0 Act of 2022 (SECURE 2.0) introduced major changes to 401(k) plans, especially for small businesses. Three major changes take effect for plan years beginning after December 31, 2024 (January 1, 2025 for a calendar-based plan). They relate to automatic enrollment, long-term part-time eligibility, and catch-up contributions. As a small business owner, it’s crucial to understand the changes to ensure your 401(k) plan is compliant.

Below we break down the SECURE 2.0 changes that will affect 401(k) plans for 2025, including practical steps to meet their requirements. If you need further assistance, contact your 401(k) provider.

Automatic Enrollment in New Plans

Automatic enrollment is a 401(k) plan feature that automatically enrolls eligible employees at a preset default contribution rate, unless they actively opt out. The feature aims to simplify participation and increase retirement savings rates among employees.

What’s New for 2025

SECURE 2.0 requires new 401(k) plans to include automatic enrollment in 2025 unless an exemption applies. The feature must meet Eligible Automatic Contribution Arrangement (EACA) standards and the following requirements:

• • Initial default rate- Must be between 3% and 10% of compensation.

• • Rate escalation - If the initial default rate is below 10%, it must increase by at least 1% annually until reaching at least 10% (but no more than 15%).

Who’s Affected

401(k) plans established on or after December 29, 2022 (the effective date of SECURE 2.0) are subject to the mandate. Plans established before December 29, 2022 are not.

Exemptions:

• • Businesses with 10 or fewer employees.
  • Businesses that are less than three years old.
  • Church and governmental plans.

How to Comply

To implement automatic enrollment, business owners should take the following steps:

• • Set Up Payroll Processes: Ensure your payroll processes account for automatic enrollment, including auto-escalation if applicable.
  • Confirm a Default Investment: Verify your plan’s default investment fund (often a target-date fund or balanced fund) is in place.
  • Notify Employees: Distribute the required auto-enrollment notice to employees before the auto-enrollment kicks in.
  • Correct Errors: Closely monitor your first year of auto-enrollment. If someone is mistakenly left out or enrolled incorrectly, use the IRS safe harbor correction method to fix it promptly​.

Long-Term, Part-Time Employees

The SECURE Act of 2019 (SECURE 1.0) introduced long-term, part-time (LTPT) rules that require employers to allow part-time employees to join their 401(k) plan after working 500+ hours per year for three consecutive years, regardless of their plan’s normal eligibility requirements.

What’s Changing for 2025

SECURE 1.0’s LTPT rules took effect in 2024. For 2025, SECURE 2.0 reduced the LTPT service requirement to two consecutive years.

Who’s Affected

401(k) plans whose eligibility requirements require employees to complete at least 500 hours of service in a 12-month period to participate. A 401(k) plan that requires fewer hours - or none at all – will never produce an LTPT employee.

How to Comply

Here are the steps you want to take to ensure LTPT employees are properly included (if applicable):

• • Track Hours in Payroll: Begin tracking part-time and seasonal employees’ hours if you don’t already.
  • Identify Eligible Employees: Identify any employees who have hit the 500-hour mark for two years in a row.
  • Enroll Eligible Employees: Once a part-time employee meets the LTPT definition, they must be allowed to join your plan on the next normal entry date. Set up a procedure to notify and enroll LTPT employees once they become eligible.

Higher Catch-Up Contributions for Ages 60-63

401(k) catch-up contributions allow employees aged 50 and older to contribute beyond standard IRS contribution limits, helping them boost their retirement savings as they approach retirement. The age 50 catchup limit for 2025 is $7,500.

What’s Changing for 2025

SECURE 2.0 allows (but does not require) plans to increase the catch-up limit for individuals aged 60-63 to the greater of $10,000 or 150% of the regular catch-up limit ($11,250 for 2025). Key details include:

• • Age Range: The enhanced limit applies from the year an individual turns 60 until the year they turn 64.
  • Inflation Indexing: The $10,000 limit will be indexed for inflation after 2025.

Who’s Affected

Employees who will be ages 60, 61, 62, or 63 in a given tax year. The standard catch-up limit applies again for the year in which a participant turns 64.

Here’s a comparison of contribution limits for 2025:

How to Comply

• • Adjust payroll & recordkeeping systems – Employers and payroll providers must be prepared to track participants who qualify for the enhanced catch-up limits based on age.
  • Notify employees – Affected participants should be informed that they can contribute more during this four-year window to maximize their retirement savings.

When Must 401(k) Plans be Amended for SECURE 2.0 Changes

Employers must comply with SECURE 2.0 changes as they take effect in 2025, but have until December 31, 2026 to formally adopt the changes by plan amendment (later deadlines apply to collectively bargained and government plans).

Next Steps for Small Business 401(k) Plans

SECURE 2.0’s 2025 changes present a few compliance challenges, but with timely action they are manageable – and even beneficial – for your business and employees. In summary, make sure to add automatic enrollment for new plans, include long-term part-timers, adjust catch-up contributions for Ages 60-63.

Partner with your 401(k) provider or advisor now to update plan documents and systems. By taking the steps outlined above, you’ll ensure your 401(k) plan stays compliant and continues to operate smoothly.