“Any change, even a change for the better, is always accompanied by drawbacks and discomforts.” — Arnold Bennett, English author
If you have a qualified retirement plan for your business, you know that every year there are changes. This year and next year bring even more than the usual number of changes. These changes require you to adapt your retirement plan, inform employees, and adjust your budget for employer contributions where applicable. Here are some changes to note:
For 2025:
Higher limits. Due to cost-of-living adjustments, many but not all of the limits for qualified retirement plans are higher in 2025 than in 2024. Here are some of these limits:
- 401(k) plan elective deferrals: $23,500, plus $7,500 for those who are age 50 and older by December 31, 2025 (the limits were $23,000 and $7,500 respectively in 2024). A higher catch-up limit for certain participants is explained below.
- Savings incentive match plan for employees (SIMPLE) elective deferrals: $16,500, plus $3,500 for those who are age 50 and older by December 31, 2024 (the limits were $16,000 and $3,500 respectively in 2023). Higher contribution limits in certain situations is explained below.
- Defined contribution plans (profit-sharing plans and simplified employee pension plans [SEPs]): the limit is $70,000 (up from $69,000 in 2024).
- Defined benefit (pension) plans: the limit is $280,000 (up from $275,000 in 2024).
- Starter 401(k)s: The elective deferral limit remains at $6,000, with a permissible catch-up amount of $1,000 for those 50 and older by the end of 2025.
- Compensation taken into account in figuring contributions and benefits: the limit is $345,000 (up from $345,000 in 2024).
Auto enrollment for 401(k). If your plan was established on or after December 29, 2022, you must begin to automatically enroll eligible participants in 2025 unless an exception applies. Auto-enrollment means an employee’s salary reduction contribution must be at least 3% to start off in 2025, but no more than 10%. Whatever the initial percentage, it increases one percentage point each year until it is 10%, but not more than 15%.
Exceptions to auto-enrollment:
- Plans in existence before December 29, 2022.
- SIMPLE-401(k)s
- Businesses that normally employ 10 or fewer employees. Once the employer passes the 10-employee threshold, auto-enrollment applies starting in the following year.
- An employer in business for less than 3 years. But once 3 years have passed, auto-enrollment applies.
Additional catch-up contributions for 401(k)s. For those age 60, 61, 62, or 63 in 2025, the catch-up limit is $11,250.
Additional catch-up contributions for SIMPLE-IRAs. For employees in companies with 25 or fewer employees, the basic limitation remains at $17,600, with a catch-up contribution of $3,850. And new for 2025, there is an even higher catch-up limit for those age 60, 61, 62, and 63 in 2025: $5,250 in addition to the basic limit of $16,500 or $17,600, whichever is applicable.
For 2026:
Catch-up contributions for highly-compensated employees. SECURE Act 2.0 said they had to make any of their catch-up contributions to a Roth account (i.e., after tax) beginning in 2024. But the IRS created a transition period, which postponed this rule until 2026. Who is highly-compensated? The threshold for 2025 is $160,000, but this may be adjusted for 2026 to reflect a cost-of-living adjustment.
Beneficiary distributions. Individuals who inherited a retirement account or IRA from someone who died after 2019, a 10-year rule took effect. However, applying the rule was not clear, and final regulations were not issued until July 19, 2024. Under the regs, beneficiaries who use the 10-year rule cannot delay taking any distributions until the end of this period (as was permissible under the former 5-year rule), but must still take RMDs during that period, with the balance of the account distributed at the end of the 10-year period. The IRS initially postponed until 2025 any penalties on beneficiaries who failed to take RMDs according to this rule. The IRS again postponed penalties until 2026.
Plan amendments. The IRS usually publishes a list each year of required amendments for individually-designed retirement plans. The list for 2023 includes updates to pre-approved defined benefit plans (see Notice 2024-82). Check the 2024 Required Amendments List. The deadline for these amendments generally is no later than December 31, 2026. If you use a prototype plan, which is one provided to you by the financial firm with which you maintain your plan, you will automatically receive documents reflecting plan amendments; you do not have to do anything other than retain the revised documents in your records.
Final thought
Review your current plan with your CPA, benefits adviser, or other professional to be sure you’re handling things correctly. If you don’t yet have a plan, a tax and/or benefits expert can advise you on your options.
