In December 2022, Congress passed the SECURE Act 2.0, which builds on retirement savings regulations set forth by the original SECURE Act of 2019. Written to expand coverage and increase retirement savings for millions of Americans, SECURE Act 2.0 introduces some major changes to retirement plans nationwide.
Since certain sections of SECURE Act 2.0 are already in effect—and even more will go into effect soon—retirement plan providers must act swiftly to ensure compliance. In this post, we offer an overview of Section 125, the part-time employees clause, then compare four methods for becoming compliant, and finally recommend a timeline for fulfilling your obligations.
SECURE stands for Setting Every Community Up for Retirement Enhancement. Now in its second iteration, SECURE Act 2.0 is designed to help employers provide easier and more affordable retirement plans for their employees.
While some Americans are finding ways to save, the nation’s collective fear of not having enough money to retire is valid: The average retirement savings in the United States is only $65,000.
To address this concern and unburden the American worker, SECURE 2.0 is creating more accessible opportunities to save for retirement.
Signed into law in 2019, the SECURE Act mandates that employers allow long-term, part-time employees to participate in their 401(k) plans. The original legislation dictates that employees must have worked at least 1,000 hours in their first year or accumulated a minimum of 500 hours of service over three consecutive years.
SECURE Act 2.0, which passed in 2022, reduces the three-year rule to two years. It also stipulates that long-term, part-time employees must also be allowed to participate in 403(b) plans that are subject to ERISA.
The new provisions under Section 125 are effective for any plan starting after December 31, 2024, which means that 401(k) and 403(b) providers must soon put in place and test the technology they will need to automatically enroll long-term, part-time workers.
Failure to do so correctly and on time could result in stiff fines as well as the legal fees associated with disputing any penalties in court.
If you’re among the retirement plan providers affected by Section 125, your first step to preparing is to understand the legislation inside and out. Once you are confident that you know what is required of you, you need to determine how you are going to identify part-time employees, track how many hours they’ve worked, over what period, and auto-enroll those who qualify, as stipulated by Section 101.
By nature, this provision necessitates the regular sharing of large volumes of data between you and the employers who sponsor your plans, including sensitive personal identifiable information (PII) and payroll details for every participant. To transfer this data, which is largely stored in employers’ payroll systems and human resources information systems (HRIS), you can implement one of four approaches—some more seamless and effective than others:
Manual data entry has its benefits. It allows plan sponsors to stick with a data collection system that works for them, and it is almost always the least expensive option in terms of hard, upfront costs. That said, the potential downfall from manual data entry cannot be understated:
Secure file transfer protocol (SFTP) and flat files offer another way to transfer retirement plan data.
With SFTP, you can bulk transfer large files of data in tables (in the form of CSV, JSON, and XML files, for example) over a secure network. The benefits of SFTP methods are that they’re generally easier for most in-house developers to build compared to custom, direct integrations (more on those next). But there are also significant drawbacks:
This method is especially cumbersome when data syncs need to happen often, which will be the case for plan providers and plan sponsors who must comply with auto-enrollment and auto-contribution increase requirements.
A more sophisticated approach involves direct integrations with the HRIS and payroll systems that house the data you need to perform auto-enrollment and auto-contribution increase functions.
The beauty of direct integrations is that data syncs happen automatically and in real time, driving efficiencies for all parties, providing your customers with an optimally seamless experience, and giving you the peace of mind that you are always in compliance with Section 101.
Crucially, custom integrations can be built to provide read and write capabilities, which means you can also use them to automatically push changes back to HRIS and payroll systems. This is especially valuable when it comes to contribution management.
Custom integrations also present significant challenges:
To get all of the advantages of custom integrations without the cost or hassle of building them in-house, you can turn to a unified employment API, which aggregates connectivity to many HRIS and payroll systems at once with a single integration. A unified employment API does the hard work of building and maintaining the integrations, and standardizing and abstracting all incoming data, so your team doesn’t have to. They are infinitely more efficient than custom integrations, so you can get to market faster and, ultimately, at less cost.
To ensure you have a solution in place to comply with Section 125 by the deadline, we recommend:
As you prepare for SECURE Act 2.0 to come into effect, don’t lose sight of the fact that it will take time to prepare to be compliant with Section 125. The least risky way to ensure compliance—not to mention the most time- and cost-effective solution—is to integrate with a unified employment API like Finch.
Finch does the hard work of integrating with HRIS and payroll providers to facilitate the secure, permissioned flow of critical business data. Our dynamic, unified employment API offers:
Talk to our sales team today to explore ways you can use Finch to ensure compliance with Section 125 of SECURE 2.0 and improve your customer experience overall.