12.4 SECURE Act & SECURE 2.0 Modernizations
Key Takeaways
- SECURE 2.0 expands coverage for Long-Term Part-Time (LTPT) workers, requiring 401(k) and 403(b) plans to allow employees with 2 consecutive years of 500+ hours of service (effective 2025/2026) to make elective deferrals, with 500+ hour years counting toward vesting.
- New 401(k) and 403(b) plans established after December 29, 2022, must implement mandatory automatic enrollment (EACA/QACA) starting between 3% and 10% with 1% annual escalation up to 10%–15%, with exemptions for small businesses (<10 employees) and new firms (<3 years old).
- Employers may offer Pension-Linked Emergency Savings Accounts (PLESAs) allowing non-HCEs to save up to $2,500 in Roth-style balances, with the first four annual distributions free of taxes, early penalties, or administrative fees.
- Under IRC §401(m)(13), employers can make matching contributions to retirement plans based on qualified student loan repayments made by employees, treating loan payments as elective deferrals for matching purposes.
- SECURE 2.0 increased the Required Minimum Distribution (RMD) age to 73 (rising to 75 in 2033), eliminated pre-death RMDs for Roth 401(k)s, reduced missed RMD excise tax penalties from 50% to 25% (10% if corrected timely), and expanded small employer start-up and contribution tax credits.
SECURE Act & SECURE 2.0 Modernizations
Quick Answer: The SECURE Act (2019) and SECURE 2.0 Act (2022) represent the most comprehensive statutory modernization of the U.S. retirement system since ERISA. Key mandates include Long-Term Part-Time (LTPT) employee eligibility (2 consecutive years of 500+ hours), mandatory automatic enrollment (3%–10% escalating to 10%–15%) for new plans, Pension-Linked Emergency Savings Accounts (PLESAs) capped at $2,500 for non-HCEs, student loan repayment matching under IRC §401(m)(13), elevating the RMD age to 73 (and 75 in 2033), eliminating pre-death Roth 401(k) RMDs, and robust small business tax credits covering up to 100% of plan start-up costs plus $1,000/employee employer contribution credits.
1. Long-Term Part-Time (LTPT) Employee Participation Mandates
Historically, employers could exclude part-time employees who failed to work 1,000 hours in a 12-month period from participating in qualified retirement plans. To expand coverage to gig workers and part-time staff, the original SECURE Act mandated coverage after 3 consecutive years of 500+ hours. SECURE 2.0 Section 125 significantly accelerated this requirement:
┌────────────────────────────────────────────────────────────────────────┐
│ LONG-TERM PART-TIME (LTPT) STATUTORY RULES (2025/2026) │
├──────────────────────────┬─────────────────────────────────────────────┤
│ Statutory Feature │ Mandated Operational Rule │
├──────────────────────────┼─────────────────────────────────────────────┤
│ Eligibility Threshold │ 2 consecutive 12-month periods with at │
│ │ least 500 hours of service (and age 21). │
├──────────────────────────┼─────────────────────────────────────────────┤
│ Plan Types Covered │ 401(k) plans and ERISA Section 403(b) plans │
│ │ (effective plan years beginning after 2024).│
├──────────────────────────┼─────────────────────────────────────────────┤
│ Benefit Scope │ ELECTIVE DEFERRALS ONLY. Employer matching │
│ │ and profit-sharing contributions are NOT │
│ │ required for LTPT employees. │
├──────────────────────────┼─────────────────────────────────────────────┤
│ Vesting Service Credit │ Each 12-month period with 500+ hours counts │
│ │ as a full year of service for vesting! │
├──────────────────────────┼─────────────────────────────────────────────┤
│ Testing Relief │ Plan sponsor may elect to exclude LTPT │
│ │ employees from ADP, ACP, and §410(b) testing│
└──────────────────────────┴─────────────────────────────────────────────┘
Crucial Administrative Distinction: Although employers are not required to provide matching or profit-sharing contributions to LTPT employees, if the employer voluntarily provides employer contributions, the employee must receive credit for all 12-month periods in which they worked at least 500 hours for vesting schedule progression.
2. Mandatory Automatic Enrollment & Escalation for New Plans
Recognizing that behavioral inertia prevents employees from opting into retirement plans, SECURE 2.0 Section 101 mandates automatic enrollment for newly established plans:
- Scope: Applies to all new 401(k) and 403(b) plans established after December 29, 2022 (mandatory compliance beginning with the 2025 plan year).
- Initial Default Deferral Rate: The plan must automatically enroll all eligible employees at a default pre-tax or Roth contribution rate of at least 3% but not more than 10% of compensation.
- Mandatory Automatic Escalation: The default contribution rate must automatically increase by 1% on the first day of each subsequent plan year until reaching at least 10% (and up to 15%) of compensation.
- Permissible Withdrawal Window: Under Eligible Automatic Contribution Arrangement (EACA) rules, automatically enrolled employees have a 90-day election window following the initial deferral to opt out and request a full refund of contributions without incurring the 10% early withdrawal penalty.
Statutory Exemptions from Mandatory Auto-Enrollment
Congress exempted four specific categories of employers from the auto-enrollment mandate:
- Small Businesses: Employers with 10 or fewer employees.
- New Businesses: Companies in business for less than 3 years.
- Grandfathered Plans: All 401(k) and 403(b) plans established on or before December 29, 2022.
- Governmental & Church Plans: All public sector and church retirement plans.
3. Emergency Savings Innovations: PLESAs & Emergency Distributions
To prevent participants from taking high-interest loans or pre-retirement account liquidations, SECURE 2.0 codified two emergency liquidity mechanisms:
┌────────────────────────────────────────────────────────────────────────┐
│ EMERGENCY LIQUIDITY REFORMS │
├──────────────────────────┬─────────────────────────────────────────────┤
│ 1. Pension-Linked │ • Available exclusively to Non-HCEs. │
│ Emergency Savings │ • Participant contributions made on a Roth │
│ Accounts (PLESA) │ basis, capped at $2,500 (indexed). │
│ (SECURE 2.0 §127) │ • Contributions eligible for employer match │
│ │ at standard plan matching rate (match goes│
│ │ into the main 401(k) trust). │
│ │ • First 4 withdrawals per plan year must be │
│ │ 100% free of fees, penalties, or taxes. │
├──────────────────────────┼─────────────────────────────────────────────┤
│ 2. Emergency Personal │ • Allows penalty-free early withdrawal of up│
│ Expense Distributions │ to $1,000 per calendar year from main DC │
│ (SECURE 2.0 §115) │ account for unforeseen emergency expenses.│
│ │ • Exempt from IRC §72(t) 10% early penalty. │
│ │ • Must be repaid within 3 years before │
│ │ another emergency distribution is allowed.│
└──────────────────────────┴─────────────────────────────────────────────┘
4. Student Loan Repayment Matching & Starter 401(k) Plans
Student Loan Matching Contributions (IRC §401(m)(13))
Many younger workers carry significant student debt, preventing them from contributing to a 401(k) and sacrificing employer matching dollars. Under SECURE 2.0 Section 110 (IRC §401(m)(13)), employers may treat "qualified student loan payments" (QSLPs) as if they were elective deferrals for matching contribution purposes:
- The employee submits annual certification of qualifying higher education student loan repayments.
- The employer deposits matching contributions into the employee's 401(k), 403(b), or SIMPLE IRA at the exact same rate and vesting schedule as regular elective deferral matches.
- The plan can test student loan match recipients separately under ACP testing to prevent nondiscrimination test failures.
Starter 401(k) & Starter 403(b) Plans (SECURE 2.0 §121)
For small employers seeking a simplified retirement solution without complex testing or employer contributions:
- Deferral-Only Design: Funded exclusively through employee salary reductions with mandatory automatic enrollment (3% to 15%).
- No Employer Contributions: Sponsoring employers make zero matching or profit-sharing contributions.
- Exempt from Testing: Completely exempt from annual ADP, ACP, and top-heavy testing.
- Indexed Contribution Cap: Employee elective deferrals are capped at the annual IRA statutory limit ($7,500 for 2026, plus a $1,100 age 50+ catch-up), rather than the full $24,500 §402(g) limit.
5. Required Minimum Distribution (RMD) Overhauls & Small Business Credits
┌────────────────────────────────────────────────────────────────────────┐
│ SECURE 2.0 RMD STATUTORY TIMELINE │
├──────────────────────────┬─────────────────────────────────────────────┤
│ Participant Birth Year │ Statutory RMD Required Beginning Age │
├──────────────────────────┼─────────────────────────────────────────────┤
│ Born Before 1951 │ Age 70½ (pre-SECURE) or Age 72 (SECURE 2019)│
│ Born 1951 through 1959 │ Age 73 (SECURE 2.0 effective 2023–2032) │
│ Born 1960 or Later │ Age 75 (SECURE 2.0 effective Jan 1, 2033) │
└──────────────────────────┴─────────────────────────────────────────────┘
Key RMD Modernizations
- Elimination of Pre-Death Roth 401(k) RMDs: Effective 2024 and ongoing, participants are no longer required to take RMDs from Designated Roth 401(k) or Roth 403(b) accounts prior to death, aligning workplace Roth plans with Roth IRAs.
- Drastic Reduction in Missed RMD Excise Tax (IRC §4974): Historically, failing to take a full RMD triggered a draconian 50% excise tax penalty on the shortfall. SECURE 2.0 reduced the statutory excise tax to 25%, and further reduced it to 10% if the taxpayer corrects the missed distribution within a statutory 2-year correction window (Correction Window).
Enhanced Small Employer Retirement Tax Credits
To encourage small business plan adoption, SECURE 2.0 dramatically increased available tax credits under IRC §45E:
| Tax Credit Category | Employer Size Threshold | Statutory Credit Value & Structure |
|---|---|---|
| Plan Start-Up Administrative Credit | ≤ 50 Employees | 100% of qualified start-up costs (up from 50%) up to $5,000 per year for the first 3 consecutive plan years (maximum total $15,000). (51–100 employees receive 50% credit). |
| Auto-Enrollment Credit | ≤ 100 Employees | $500 per year for 3 consecutive years ($1,500 total) for adding an EACA auto-enrollment feature to a new or existing plan. |
| Employer Contribution Credit | ≤ 50 Employees | Additional tax credit equal to a percentage of employer contributions made on behalf of employees earning under $100,000 (up to $1,000 per employee):<br/>• Years 1 & 2: 100% ($1,000/emp)<br/>• Year 3: 75% ($750/emp)<br/>• Year 4: 50% ($500/emp)<br/>• Year 5: 25% ($250/emp)<br/>• Year 6+: 0% (Phased down for 51–100 employees). |
Under the Long-Term Part-Time (LTPT) employee participation rules codified under SECURE 2.0, what are the statutory eligibility and vesting requirements for part-time workers in an employer's 401(k) plan?
Under SECURE 2.0 statutory provisions governing Pension-Linked Emergency Savings Accounts (PLESAs), which operational constraint applies to participant eligibility, contributions, and withdrawals?
A small business with 35 employees establishes its first Safe Harbor 401(k) plan in 2026. Under SECURE 2.0 small employer pension tax credit provisions (IRC §45E), what maximum federal income tax credit is available to offset the employer's qualified plan start-up administrative costs?