The SECURE 2.0 Act introduces several provisions that will impact payroll configurations, particularly those that will take effect on Jan. 1, 2025. Here are the key provisions that clients need to be aware of:
1. Automatic enrollment requirement
- Provision: Clients must automatically enroll eligible employees in new 401(k) and 403(b) plans established after Dec. 29, 2022.
- Impact on payroll: The payroll system will need to be configured to automatically deduct contributions from employees’ paychecks unless they opt out. Clients must also select an initial contribution rate between 3% and 10% of the employee’s salary.
2. Automatic escalation of contributions
- Provision: Plans must include an automatic escalation feature that increases employee contribution rates by 1% annually until reaching a maximum of 10% to 15%.
- Impact on payroll: Clients will need to ensure the payroll system can accommodate these increases and ensure that employees are notified about their contribution rates and any changes.
3. Expanded eligibility for part-time workers
- Provision: The eligibility requirement for long-term part-time workers (LTPT) is reduced from three years to two years. This allows employees who work at least 500 hours in two consecutive years to participate in retirement plans.
- Impact on payroll: Clients will need to ensure their payroll systems are updated to track hours worked by part-time employees and determine eligibility for plan participation.
4. Roth contributions for employer matches
- Provision: Clients may allow employees to elect Roth contributions for client matching and non-elective contributions.
- Impact on payroll: The payroll system will need to differentiate between pre-tax and Roth contributions, ensuring proper tax treatment and recordkeeping.
These provisions necessitate substantial adjustments to payroll configurations and processes to ensure compliance with the SECURE 2.0 Act by Jan. 1, 2025. It is imperative for clients to begin preparations now by collaborating with their retirement plan administrators to amend plan documents, ensure that the payroll system accurately reflects these changes, update relevant policies and train staff on the new requirements. This proactive approach will facilitate a seamless transition when the changes take effect.