A lot has changed since the 401(k) first came onto the scene in 1978. Contribution limits have risen significantly, adults 50 and older can now make catch-up contributions, and an increasing number of employers now offer Roth 401(k)s for employees who want to enjoy tax-free withdrawals in retirement.
In 2025, there will be two new changes to 401(k)s that could increase their accessibility and help workers grow their retirement savings faster than ever before. Here's what you need to know so you're ready for them.
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1. Easier 401(k) access for part-time workers
Current law says employers must enable employees to participate in the company's 401(k) plan, if available, when workers meet one of the following criteria:
- They work for the company for one year (at least 1,000 hours during that year).
- They work for the company for three consecutive years (at least 500 hours in each year).
The SECURE 2.0 Act passed at the end of 2022 changes the latter requirement for 2025 and later years. Now, part-time employees will need to complete just two consecutive years of service with at least 500 hours each year to be eligible for 401(k) plan participation.
This will not apply to collectively bargained plans, and service before 2021 doesn't count. This same rule will apply to part-time employees covered by a 403(b) plan if that plan is subject to ERISA.
Of course, having access to a 401(k) and being able to contribute to one are two very different things. Part-time employees may not have the extra cash available to set aside much money here. But even if you're able to save a few dollars every month, this could still add up over time, especially if you qualify for a company match.
2. Mandatory auto enrollment
Mandatory auto enrollment has been shown to significantly increase 401(k) participation, which can also increase retirement savings available at the end of your career. Some companies already have auto enrollment policies in place, but next year it will become a federal law.
However, it won't apply to all 401(k)s right away. The following categories won't have to enact auto enrollment policies if they don't want to:
- Existing 401(k)s and 403(b)s (grandfathered)
- Small businesses with 10 or fewer employees
- Businesses that have been operating for less than three years
- Church plans
- Governmental plans
Because all existing plans are grandfathered, it's likely that many employees won't notice a change right away. This may become more prevalent in future years, though, as more companies enact auto enrollment.
The law requires that auto enrollment defer at least 3% but not more than 10% from employees' paychecks in the first year. This is supposed to increase by 1% every year until it reaches at least 10% but not more than 15% of employees' salaries. Employees, of course, have the opportunity to opt out or set their own contribution rate at any time.
If you have any questions about how these changes might affect your access to a 401(k) or your monthly deferral percentage, contact your company's HR department or your 401(k) plan administrator for clarity. It's best to do this in advance of the new year so you understand exactly what you're getting in 2025.
