New legislation enhances 401(k) access and benefits for Part-Time U.S. workers starting in 2025
Effective January 1, 2025, the Secure 2.0 Act reduces service hour requirements and mandates automatic enrolment in 401(k) plans, enhancing retirement savings opportunities for part-time U.S. employees.
In a significant move to bolster retirement savings among part-time employees, the U.S. government has enacted provisions under the Secure 2.0 Act of 2022, effective January 1, 2025. These changes aim to make 401(k) plans more accessible to part-time workers by reducing the service hours required for eligibility and introducing automatic enrolment features. The initiative reflects a growing recognition of the need to support the retirement planning efforts of a diverse and evolving workforce.
Historically, part-time employees faced challenges in qualifying for 401(k) plans due to stringent service hour requirements. The new legislation reduces the threshold, allowing employees who have completed at least 500 hours of service in two consecutive years to participate in 401(k) plans. This adjustment is anticipated to significantly increase participation rates among part-time workers, providing them with greater opportunities to save for retirement.
Common Questions about Small Business 401(k) Retirement Plans. Photo: MCF Capital Management, LLC.
Key changes under the Secure 2.0 Act
Starting January 1, 2025, employers are mandated to automatically enroll eligible employees into 401(k) and 403(b) plans with a minimum contribution of 3% of their salary. This contribution rate is set to escalate annually by 1% until it reaches a range between 10% and 15%. Employees retain the option to opt out or adjust their contribution levels according to their financial circumstances. Notably, this automatic enrolment requirement exempts small businesses with fewer than 10 employees and new companies operating for less than three years.
The legislation introduces a provision allowing participants to make one penalty-free withdrawal of up to $1,000 annually for emergency expenses. This measure offers financial flexibility to employees facing unforeseen financial challenges, enabling them to access their retirement funds without incurring the typical 10% early withdrawal penalty. To maintain the integrity of retirement savings, individuals are encouraged to repay the withdrawn amount within three years; however, they are restricted from making additional emergency withdrawals during this repayment period unless the amount is reimbursed.
Implications for employers and employees
Employers are encouraged to review and update their retirement plan policies to align with the new requirements. This includes adjusting eligibility criteria, implementing automatic enrolment processes, and communicating these changes effectively to employees. For employees, especially those working part-time, these reforms present an enhanced opportunity to build a more secure financial future through increased access to retirement savings plans.
The Secure 2.0 Act of 2022 represents a pivotal advancement in retirement planning, particularly benefiting part-time workers who previously encountered barriers to participating in employer-sponsored retirement plans. By lowering eligibility thresholds and introducing automatic enrolment, the legislation aims to foster a more inclusive and secure retirement savings environment for the American workforce.