Retirement plans are an important way to help employees build financial security. There is great flexibility for employers in choosing the plan best suited to their company’s situation (e.g., number of employees, financial position of the business, corporate culture). Yet, Bureau of Labor Statistics (BLS) reported earlier this year that only 57% of companies with fewer than 100 employees offered any retirement plan. If you look at the tax rules, there’s really no reason why many more small businesses don’t give their employees a retirement savings opportunity.
Choosing a plan
A plan can be chosen to optimize savings, shift the burden of funding in whole or in part to employees, and provide tax breaks for employers. One of the challenges with respect to retirement plans is the constantly changing tax landscape; the rules in effect now may be different next year. To make good choices, understand what the rules are, look at your plan options, and have an in depth discussion with your CPA or other adviser who is savvy about retirement plans.
COLAs for 2025
Each year, a number of dollar limits related to retirement plans and IRAs are adjusted for inflation; they are referred to as Cost of Living Adjustments, or COLAs. Here is a list of some key changes for 2025 (and a comparison with 2024 limits) for qualified retirement plans (IRA and Roth IRA COLAs are not included here):
- Maximum contribution to a profit-sharing, SEP, or other defined contribution plan: $70,000 ($69,000 in 2024).
- Maximum benefit limit for a defined benefit (pension) plan: $280,000 ($275,000 in 2024).
- Maximum amount of compensation taken into account in figuring contributions and benefits: ADD
- Salary deferral limit for 401(k) plans—basic amount: $23,500 ($23,000 in 2024).
- Catch-up contribution for 401(k) plans—basic amount: $7,500 (unchanged) (see below for a higher limit for those ages 60-63).
- Salary deferral limit for SIMPLE-IRAs—basic amount: $16,500 ($16,000 in 2024). For employers with 25 or fewer employees, the limit is $17,600 (unchanged).
- Catch-up contribution for SIMPLE-IRAs: $3,500 (unchanged) or for employers with 25 or fewer employees $3,850 (unchanged) (see below for a higher limit for those ages 60-63).
- Compensation for determining a “key employee” for top-heavy plan purposes is $230,000 ($220,000 in 2024).
- Pension-linked emergency savings accounts (PLESAs) limit: $2,500 (unchanged).
- Compensation limit for SEPs for participation: $750 (unchanged).
Law changes
Several law changes made by SECURE Act 2.0 back in 2022 take effect in 2025:
- Automatic enrollment for new 401(k)s. Employers starting up 401(k) plans in 2025 must automatically enroll eligible employees and use a default elective deferral percentage of between 3% to 10% of employee compensation. The elective deferral percentage will increase by 1 percentage point each year, up to a maximum of 15%. The elective deferral is what employees contribute to the plan. Employees may opt out or reduce the default contribution percentage. Exemption: Employers with fewer than 10 employees and companies in business less than 3 years are not subject to automatic enrollment. Of course, they can choose to use this feature.
- Catch-up limits increased:
- 401(k)s: Participants age 50 or older by the end of the year are allowed to make a catch-up contribution as noted in COLAs. Those ages 60, 61, 62, or 63 by the end of 2025 can make an even greater catch-up contribution of the greater of $10,000 or 150% of the standard catch-up amount. This means their catch-up limit for 2025 is $11,250. While a 401(k) isn’t required to permit catch-up contributions, why not do it?
- SIMPLE-IRAs. Participants age 50 or older by the end of the year are allowed to make a catch-up contribution as noted in COLAs. Those ages 60, 61, 62, or 63 by the end of 2025 have a catch-up limit in 2025 of $5,250.
- Easier participation for long-term part-timers. Employees who work at least 500 hours per year (part-timers) can participate in an employer’s plan as long as they’ve worked these hours consecutively for a set number of years. It used to require 3 consecutive years. Starting in 2025, only 2 consecutive years are necessary.
What to do now
2024 isn’t over, and there’s still time to set up and fund a plan for 2024—up to the extended due date of the business’ return. But it’s important to put 2025 in place now if possible. Small businesses that can’t afford to fund a plan may be able to use a Starter 401(k) as a way to give employees a retirement savings option. Explore the small employer tax credits related to retirement plans. Many, many options to think about.
To read more about tax planning and retirement, see this list of blogs.
