SECURE 2.0 Revisited: Auto-Enrollment and Catch-Up Contributions

With nearly eight months since it passed in December of 2022, the SECURE 2.0 Act is now part of the everyday vernacular in the retirement and payroll industries, and there has been time for some questions to get answered about how to implement it well. Here is a closer look at some critical clarifications on implementing the policies in SECURE 2.0 to help your employees maximize their retirement savings.

SECURE 2.0 Revisited Auto-Enrollment and Catch-Up Contributions

Understanding Auto-Enrollment for Employer-Sponsored Requirement Plans

One of the most significant changes with SECURE 2.0 is the requirement to auto-enroll new employees in retirement plans starting in 2025. Any 401(k) and 403(b) plans established after the Act was enacted must have auto-enrollment for new employees. The initial contribution will be between three and 10%, increasing by one percent yearly until it reaches 10 to 15%. This will make retirement savings automatic.

Some categories of companies or non-profits are exempt from this rule. These include:

  • Companies that have been in business for less than three years
  • Small businesses with ten or fewer employees
  • Church and government entities

Talk to a financial professional about your options if your organization feels it may fall into one of these exemption categories. In addition, any retirement plans in place before December 29, 2022, are exempt from the auto-enrollment process.

Catch-up Contribution Limits

Another change with SECURE 2.0 is an increase in catch-up contribution limits. This is vital, as over half of all Americans are behind on retirement planning.

Employees who need to get caught up and who are over 50 can add an additional $7,500 a year to their 401(k) plan, and those between the ages of 60 and 63 can add $10,000 a year in addition to the annual limits. Before the Act, the catch-up contributions were limited to $6,500, an increase of $1,000 or $3,500 depending on the person’s age.

While this seems straightforward, this part of the act has created some questions regarding employees that have wages over $145,000 in the prior calendar year. The Act indicates that these employees must make catch-up contributions in a Roth account. This creates challenges in defining wages and creating plans for employees hired in the middle of the year or with variable pay.

These questions still need clarification, but they do not exempt employers with high-income employees from conforming to the regulations. Thus, working with a payroll expert and a tax accountant is going to be important as employers work to implement the changes of SECURE 2.0 by the adherence deadline. To get further clarification on this part of the regulation, check out PayHub’s SECURE 2.0 Act Guide.

Guide to Secure Act 2.0 CTA

Additional FAQs about SECURE 2.0

In addition to questions about catch-up limits and auto-enrollment, employers and employees have asked for additional clarification. Some common questions include:

Does the employer match credit apply to new plans or existing employer-sponsored retirement plans?

SECURE 2.0 added an employer contribution credit for businesses with up to 100 employees. This credit applies to newly defined contribution plans.

Do bonuses count for the $145,000 income limit for catch-up contributions?

Yes, all gross wages, including bonuses, are included in the $145,000 income limit for the catch-up contributions.

Does automatic enrollment apply to new or existing retirement plans?

Automatic enrollment applies to new 401(k) or 403(b) plans established after December 29, 2022.

Get Expert Help with Retirement Planning from Workforce PayHub

As you consider the SECURE 2.0 Act and its impact on your benefits planning, ensure you get the right advice and have the best practices to protect your business and your employees. If you’re ready to streamline retirement planning for your business and employees, contact Workforce PayHub today to start the process.

Eric Jones
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