The Setting Every Community Up for Retirement Enhancement 2.0 Act of 2022 (SECURE 2.0) was enacted on December 29, 2022, as a component of the Consolidated Appropriations Act of 2023, and made sweeping changes to qualified retirement plans and individual retirement accounts (IRAs). In earlier Client Alerts we focused on provisions of SECURE 2.0 that became effective immediately upon enactment, or in 2023 (see Part I of this Client Alert series), or in 2024 (see Part II of this Client Alert series). Additional provisions will become effective in 2025 and or later. This Client Alert summarizes those remaining provisions.

While all the provisions of SECURE 2.0 are not applicable to every plan and many are optional, employers are encouraged to review the provisions and determine which ones apply to their plan and whether any optional provision is a desired enhancement to the benefits offered under their plan. To the extent a mandatory provision applies, steps should be taken to ensure that the plan operates in compliance with such provision as of its effective date. 

The remaining provisions of SECURE 2.0 that will become effective in 2025 or later are outlined below (references are to the applicable sections of SECURE 2.0). 

Effective in 2025

Expanding Automatic Enrollment in Retirement Plans (Section 101)

Automatic enrollment in 401(k) plans significantly increases participation, and many employers previously incorporated automatic enrollment into existing plans. For plan years beginning after December 31, 2024, new 401(k) and 403(b) plans must automatically enroll employees upon their becoming eligible for participation. Existing 401(k) and 403(b) plans that were in effect prior to the enactment of SECURE 2.0 (December 29, 2022) are grandfathered and are not subject to this requirement. An exception is also provided for employers in business for less than three years, small businesses (10 or fewer employees), SIMPLE plans, church plans, and governmental plans. The automatic deferral amount for the first year of participation must be at least 3% of compensation and must increase by 1% per year thereafter until reaching a minimum of 10% (but cannot exceed 15%). Employees may opt out of coverage or elect a different deferral percentage.

Higher Catch-up Limit for Employees Ages 60, 61, 62, and 63 (Section 109)

Under current law, a plan may permit employees who attain age 50 by the end of the year to make catch-up contributions in excess of the normal limits under the Internal Revenue Code (IRC). For 2024, the amount of such catch-up contributions is limited to $7,500 for 401(k) plans and $3,500 for SIMPLE plans. For taxable years beginning after December 31, 2024, the catch-up limit for participants who attain the age of 60, 61, 62, or 63 during such year is increased to the greater of $10,000 or 150% of the regular catch-up limit in effect for 2024. (The increased catch-up amount for 2025 will be $11,250.) The increased catch-up limit is indexed for inflation for years after 2025.

Improving Coverage for Part-Time Workers (Section 125)

The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE Act) required employers to allow long-term, part-time (LTPT) workers to contribute to 401(k) plans. As originally defined in the SECURE Act, LTPT workers are those who complete at least 500 hours of service in each of three consecutive years (not counting years of service before 2021). SECURE 2.0 reduces this time period from three years to two consecutive years, effective for plan years beginning after December 31, 2024. The LTPT worker rule also applies to 403(b) plans.

This provision also provides that pre-2021 service is disregarded for vesting purposes (effective as if included in the SECURE Act). LTPT workers only need to be made eligible for elective deferrals under these rules. Plans are not required to (but may) expand eligibility to LTPT workers for purposes of matching or other employer nonelective contributions, or may apply a 1,000-hour-per-year threshold to be eligible for such contributions.

IRS Notice 2024-73 provides guidance on the application of the LTPT requirements to 403(b) plans, effective for plan years beginning after December 31, 2024. The notice also delayed the effective date of previously issued LTPT regulations for 401(k) plans to plan years beginning on or after January 1, 2026. However, plans must comply in good faith with the statute now, before the guidance is effective.

Long-Term Care Contracts Purchased with Retirement Plan Distributions (Section 334)

Retirement plans may provide for distributions of up to $2,500 per year to pay premiums for certain long-term care insurance contracts for a participant and/or the participant’s spouse. This amount is indexed for inflation after 2024. Such distributions are not subject to the 10% early distribution penalty. The contract, and the issuer thereof, must meet certain quality and reporting standards, including providing a Long-Term Care Premium Statement to the participant (to be filed with the plan), in order for the early distribution provisions to apply. This provision is effective for distributions made after December 29, 2025.

Effective in 2026 and Later

Saver’s Match (Section 103)

Under current law, eligible lower-income individuals can claim a nonrefundable credit against income tax and alternative minimum tax for contributions they make to IRAs, employer retirement plans (e.g., 401(k) plans and 403(b) annuities), and ABLE accounts. Effective for plan years beginning after December 31, 2026, with respect to IRAs and employer plans, this credit is changed to a federal matching contribution to be made on behalf of an eligible individual to the taxpayer’s IRA or employer plan.

An eligible person for this purpose is, generally, any individual 18 or older, excluding individuals for whom a deduction by another taxpayer is allowable and students, as defined in IRC Section 152(f)(2). The match is 50% of the individual’s contributions to an IRA or retirement plan, up to $2,000 (maximum $1,000 matching contribution). However, contributions to a Roth IRA and after-tax Roth deferrals are not eligible for the match. The match phases out based on the individual’s modified adjusted gross income (between $41,000 and $71,000 for married filing a joint return; $20,500 and $35,500 for single taxpayers and married filing separate; and $30,750 and $53,250 for head of household). These amounts are indexed for inflation after 2027. Amounts of less than $100 are not made as a match and instead may be taken as a credit on the taxpayer’s return. Saver’s match contributions are generally treated as elective deferrals (but do not count toward limits and cannot be withdrawn for hardship purposes).

Increase in Age for Required Beginning Date for Mandatory Distributions (Section 107)

In 2023, the required minimum distribution age was increased to 73 for individuals who attained age 72 after December 31, 2022. The required minimum distribution age is scheduled to increase again in 2033, to age 75 for those individuals who attain age 73 after December 31, 2032.

Deferral of Tax for Certain Sales of Employer Stock to Employee Stock Ownership Plan Sponsored by an S Corporation (Section 114)

Under current law, a shareholder in a C corporation that sponsors an employee stock ownership plan (ESOP) may elect to defer the recognition of gain on the sale of such stock to the ESOP, to the extent the sales proceeds are reinvested in qualified replacement property (e.g., stock or securities of a US operating corporation). SECURE 2.0 expands this gain deferral option to include sales of stock issued by an S corporation to an ESOP sponsored by that corporation but limits the deferral to 10% of the gain. This provision is effective for sales to an S corporation ESOP made after December 31, 2027.

Certain Securities Treated as Publicly Traded for Certain Employee Stock Ownership Plan Purposes (Section 123)

Certain operating requirements for an ESOP depend on whether the employer stock owned by the ESOP is “publicly traded” and “readily tradeable on an established securities market.” Under SECURE 2.0, certain non-exchange-traded securities may qualify as “publicly traded,” potentially making it easier and less costly for the employer to offer an ESOP. Such securities may qualify if the security (1) is subject to price quotations by at least four dealers on a Securities and Exchange Commission-regulated interdealer quotation system, (2) is not a “penny stock,” (3) is not issued by a shell company, and (4) has a public float of at least 10% of outstanding shares. Securities issued by a domestic corporation may be eligible only if the corporation publishes annual audited financial statements. Additional requirements are imposed with respect to securities issued by a foreign corporation. The scope of the changes is unclear, as the changes were added to Code Section 401(a)(35), which only addresses the requirement that ESOPs allow limited diversification out of employer stock as employees approach retirement. The Senate summary of the bill does include a broad statement that the changes allow more employers “… to treat their stock as ‘public’ for ESOP purposes, thus making it easier for these companies to offer ESOPs….” This implies that a broad change was intended, not one limited to the diversification rule. This provision is effective for plan years beginning after December 31, 2027.

Modification of Age Requirement for Qualified ABLE Programs (Section 124)

ABLE programs are created and maintained at the state level to provide tax-advantaged savings programs for certain individuals with disabilities under which tax-free distributions may be made for qualified disability expenses of the designated beneficiary. SECURE 2.0 increases the age by which the disability must occur in order for an individual to be eligible under an ABLE program from age 26 to age 46, effective for tax years beginning after December 31, 2025.

Requirement to Provide Paper Statements in Certain Cases (Section 338)

SECURE 2.0 requires defined contribution plans to provide paper statements to participants at least once a year and defined benefit plans to provide paper statements at least once every three years. This requirement is not applicable to a plan that provides statements in accordance with the notice, consent, and other requirements for electronic delivery under Department of Labor regulations or, in the case of a plan that permits participants to consent to such electronic delivery, the participant or beneficiary has so elected. The Secretary of Labor is directed to update the applicable regulations by December 31, 2024. This provision is effective for plan years beginning after December 31, 2025.

Mandatory Roth Treatment of Certain Catch-up Contributions (Section 603)

As discussed in an earlier Client Alert, SECURE 2.0 requires that catch-up contributions for participants whose FICA wages for the prior year exceed $145,000 (as indexed for inflation after 2024) must be made on a Roth after-tax basis, beginning in 2024. In Notice 2023-62, the IRS postponed the effective date of this provision until taxable years beginning after December 31, 2025, to allow additional time for systems to be programmed and new processes implemented. Until this postponed effective date, catch-up contributions may continue to be made on a pretax basis regardless of the amount of a participant’s wages. Once this provision becomes effective, if a plan has participants who exceed the wage limit but does not otherwise offer Roth after-tax catch-up contributions, the plan may not allow catch-up contributions by any participant (whether or not above the wage limit).

Enhancing Retiree Health Benefits in Pension Plans (Section 606)

Under current law, assets in an overfunded pension plan may be transferred to a separate account under the plan and utilized to pay retiree health and/or life insurance benefits, subject to certain limitations. Prior to SECURE 2.0, this provision was scheduled to sunset at the end of 2025. SECURE 2.0 extends this sunset date to December 31, 2032. SECURE 2.0 also revised the percentages applicable to the assets transferred and the level of funding required, providing that the transfer of assets for purposes of payment of retiree health and/or life insurance benefits may not exceed 1.75% of the plan’s assets and requiring that the plan be at least 110% funded (these changes were effective as of the enactment date).

Next Steps

In Notice 2024-02, the IRS extended the deadline by which a plan must be amended for the provisions of SECURE 2.0 (and for the SECURE Act) to December 31, 2026 (December 31, 2028, for collectively bargained plans and December 31, 2029, for governmental plans). Employers are reminded that even though their plan document may not have been amended to reflect these provisions, the plan must operate in compliance with each applicable provision of SECURE 2.0 from the effective date thereof. Employers responsible for administration of their plan should familiarize themselves with the provisions of SECURE 2.0 and work with their third-party administrators, recordkeepers, and counsel to assure systems and documents are in place to timely comply with the provisions as they become applicable.