audit requirement for 401k plans

Impact of SECURE 2.0 Act on 401k Plans

The SECURE 2.0 Act of 2022 introduced sweeping changes to retirement plan rules in the United States, building on the original SECURE Act of 2019. The SECURE 2.0 Act provides increased tax incentives for businesses to enhance employee satisfaction and improve overall business performance. The aim is to increase retirement savings access, enhance plan flexibility, and improve financial security for workers and retirees. This article highlights the most important changes affecting 401k plans, including automatic enrollment, catch-up contribution updates, RMD adjustments, Roth-related reforms, student loan matching, and more. The timeline of these changes spans from 2023 through 2027, and both employers and employees need to understand what’s coming.

Introduction to Retirement Plans

A retirement plan is a type of savings plan designed to help individuals secure their financial future after they retire. There are several types of retirement plans available, including 401k plans, individual retirement accounts (IRAs), and employer-sponsored retirement plans. These plans offer significant tax savings and flexible investment options, making them an attractive choice for those looking to build their retirement savings.

One of the key benefits of retirement plans is employer contributions, such as matching contributions, which can significantly boost an employee’s retirement savings. Small business owners and self-employed individuals can also take advantage of retirement plans tailored to their needs, such as SEP IRAs and solo 401k plans. These plans can provide a steady income stream in retirement, helping individuals achieve their retirement goals.

Understanding the different types of retirement plans and their benefits is crucial for making informed decisions about retirement savings. Consulting with a financial professional can help individuals choose the best retirement plan for their needs, ensuring they maximize their retirement benefits and secure their financial future.

1. Mandatory Automatic Enrollment (Effective 2025)

Beginning in 2025, most newly established 401k and 403(b) plans that employers offer must include automatic enrollment. New hires will be automatically enrolled at a contribution rate of at least 3%, with an annual increase of 1% until reaching at least 10% (but no more than 15%). Employer matching contributions can significantly enhance retirement savings for employees.

Exemptions: Plans established before the act, businesses with 10 or fewer employees, and those under 3 years old are exempt.

What employers need to do: Update plan documents, payroll systems, and employee communication strategies.

Benefit to employees: Helps workers begin saving automatically — especially beneficial for those who might delay enrollment otherwise.

Employer Responsibilities

Employers who offer retirement plans have several important responsibilities, including administering the plan and ensuring compliance with regulations. They must provide employees with detailed information about the plan, including contribution limits and available investment options. Employer contributions, such as matching contributions, are a significant benefit of retirement plans and can help attract and retain top talent.

Ensuring that the plan is fair and nondiscriminatory is another critical responsibility, meaning all employees should have equal access to the plan. Small businesses may be eligible for tax credits for starting a retirement plan, making it more affordable to offer this valuable benefit to employees. Employers can also take advantage of seamless payroll integration to simplify plan administration and reduce the administrative burden.

Understanding their responsibilities and the benefits of offering a retirement plan is essential for employers. Consulting with a tax professional can help ensure they are taking full advantage of all available tax incentives, ultimately benefiting both the employer and the employees.

In addition, audit requirement for 401k plans must be evaluated annually — particularly for large plans with 100 or more eligible participants. Employers should be aware of when a 401k plan audit is mandatory and prepare accordingly to remain compliant.

Catch-Up Contribution Changes

Increased Limits for Ages 60–63 (Starting 2025)

Employees aged 60–63 will be eligible to contribute higher catch-up amounts: either $10,000 or 150% of the standard catch-up limit (whichever is greater). This helps late-career workers boost their retirement savings in a short window.

Roth Requirement for High Earners (Effective 2026)

Workers earning over $145,000 in the previous year will be required to make catch-up contributions on a Roth (after-tax) basis. High earners will need to make catch-up contributions to Roth accounts starting in 2026. The IRS granted a two-year implementation delay, so this requirement will begin in 2026.

What employers need to do:

  • Prepare systems to track employee age and income. 
  • Enable Roth options in plans, if not already available. 
  • Inform employees of how their catch-up contributions may change. 

Required Minimum Distribution (RMD) Updates

  • RMD age increased: The age for required minimum distributions (RMD) has increased from 72 to 73 (starting in 2023), and will eventually rise to 75 by 2033. 
  • Penalty reduced: The excise tax for missed RMDs dropped from 50% to 25%, or 10% if corrected in a timely manner. 
  • No RMDs on Roth 401k: Starting in 2024, Roth 401k accounts are no longer subject to lifetime RMDs. 

Impact: These changes give retirees more flexibility in managing their withdrawals and taxes.

Roth Contribution and Conversion Enhancements

Employers can now allow matching contributions to be made as Roth (after-tax), if the employee elects.

These contributions must be immediately 100% vested.

Obtaining a full employer match can significantly increase the total retirement savings over time.

Roth catch-up contributions become mandatory for high earners in 2026.

Opportunity for participants: Increases potential for tax-free growth and withdrawals.

Student Loan Matching Contributions

Employers can match employee student loan payments with 401k contributions — even if the employee isn’t contributing to the plan themselves. Many companies offer student loan matching contributions to enhance the value of their retirement plans. This allows employees focused on repaying loans to still benefit from retirement savings.

Employer responsibility:

  • Amend plan documents 
  • Verify and match student loan payments 

Employee benefit: Earn employer 401k contributions without needing to defer pay into the plan.

Emergency Savings Provisions

Employers can add a short-term savings account linked to the 401k, with a $2,500 limit, accessible for emergencies. These funds can be withdrawn up to four times per year without penalties or fees.

Emergency Withdrawals up to $1,000 (2024)

Participants may take one penalty-free emergency withdrawal per year for unforeseen expenses. Early withdrawals from 401k plans are subject to strict regulations and penalties imposed by the IRS. If not repaid, no new emergency withdrawal is allowed for three years.

Investment Options

Retirement plans offer a wide range of investment options, including stocks, bonds, and mutual funds. The specific investment options available can vary depending on the type of retirement plan and the plan provider. Understanding the risks and potential returns of each investment option is crucial for making informed decisions about where to allocate retirement savings.

Diversification is key when investing in a retirement plan, as it helps reduce risk and increase potential returns. Some retirement plans, such as 401k plans, may offer target-date funds, which automatically adjust the investment mix based on the employee’s retirement date. Other plans, such as IRAs, may offer more flexible investment options, including individual stocks and real estate.

When selecting investment options for a retirement plan, it’s essential to consider factors such as fees, risk, and potential returns. Consulting with a financial advisor can help individuals make informed investment decisions, ensuring their retirement savings are well-managed and aligned with their retirement goals.

Plan Administration

Plan administration involves the day-to-day management of a retirement plan, including tasks such as record-keeping and ensuring compliance with regulations. Employers can choose to outsource plan administration to a third-party provider or handle it in-house. However, plan administration can be complex and time-consuming, requiring significant resources and expertise.

Ensuring that plan administration is handled correctly is essential to avoid errors and potential penalties. This includes tasks such as participant education and communication, monitoring investment options, and ensuring compliance with regulations. Employers should consider factors such as cost, expertise, and service when selecting a plan administrator.

Consulting with a financial professional can help employers navigate the complexities of plan administration, ensuring that their retirement plan is managed effectively and in compliance with all regulations. This not only helps protect the plan assets but also ensures that employees receive the full benefits of the retirement plan offered.

Additionally, companies should understand who audits 401k plans, especially for plans with a large number of participants. Independent auditors play a key role in ensuring plan integrity and regulatory compliance.

Other Key Reforms

  • Part-time employee eligibility: Employees working 500+ hours for two consecutive years must be allowed to participate starting in 2025. 
  • Saver’s Match (2027): Replaces the Saver’s Credit with a federal match deposited directly into the retirement account. 
  • “Lost and Found” for retirement accounts: A national database to help employees locate forgotten or abandoned 401k accounts, expected by late 2024. 
  • Administrative relief: More flexible correction rules for plan errors and participant overpayments. The plan sponsor is responsible for selecting the investment options available for participants. 

Conclusion

SECURE 2.0 introduces broad changes aimed at increasing participation, expanding saving opportunities, and reducing administrative burdens. Retirement services include plan design, investment strategies, enrollment processes, and compliance testing, which are essential for managing retirement plans. Key provisions like automatic enrollment and expanded catch-up limits will require action from employers, while workers stand to benefit through greater flexibility, tax advantages, and new ways to grow their retirement savings. Employers should begin reviewing plan documents, updating systems, and communicating with participants now to ensure a smooth transition as these rules take effect between 2023 and 2027.