GUEST AUTHOR: 2025 Retirement Update – New IRS Limits and SECURE 2.0 Provisions Taking Effect for Small Plans
The weather is getting colder, decorations are going up, and people are making travel plans across the country. It can only mean one thing…time to start planning for the 2025 tax year!
The IRS recently announced the 2025 contribution limit increases. In addition, there are important law changes that are taking effect for the first time in 2025 and 2026.
2025 Maximum Limitations for Retirement Plans: 2025 2024
Deferrals
Maximum Deferrals for 401(k) 23,500 23,000
Maximum Catch-Up Contributions for 401(k) 7,500 7,500
Maximum Catch-Up Contributions for 401(k)(ages 60-63) 11,250 NA
Defined Contribution Allocations
Defined Contribution Maximum Allocations 70,000 69,000
Defined Benefit Plans
Annual Benefit Limit 280,000 275,000
Salaries
Maximum Annual Salary for Retirement Plans 350,000 345,000
Salary to Determine Highly Compensated Employee 160,000 155,000
Salary to Determine Key Employee- Officer 230,000 220,000
Social Security Taxable Wage Base
Taxable Wage Base 176,100 168,600
Required Minimum Distribution Age 73 73
SECURE 2.0 Changes
The SECURE 2.0 Act was passed in December 2022 with sweeping changes to qualified retirement plans. Several of those provisions take effect for the first time in 2025 and 2026. We have summarized the changes that we believe will most impact small plan sponsors and their advisors:
Increased Catch-Up Contributions
Participants over age 50 are allowed to make “catch-up” contributions above the normal limit. In 2025 the catch-up contribution is $7,500. Starting in 2025, this amount is increased to $11,250 for participants between the ages of 60-63.
Long-Term Part Time Employees Eligibility
Retirement plans are allowed to place eligibility requirements based on employee service and age. However, starting in 2025, employees who have worked over 500 hours for two consecutive years and are not already participants of the plan must enter the plan for employee contributions only.
Employees who enter the plan exclusively due to this law are not required to receive employer contributions. They just need the opportunity to contribute to the plan themselves. Only years of service after January 1, 2021 are considered for this purpose.
Automatic Enrollment Required for Plans Established After 2022
Plans established after 12/29/2022 need to have an automatic enrollment provision that takes effect by 2025. This means that by 1/1/2025, eligible employees who do not make a deferral election need to be added to the plan at a certain deferral percentage (between 3% – 10%). There also must be an automatic escalation provision of 1% per year following the initial year of eligibility, limited to 10% of compensation.
IMPORTANT: This only applies for new plans. Plans established before 12/29/2022 do not require this.
Catch-Up Contributions Must be Roth for High-Paid Employees
Finally, beginning in 2026, the Act requires that “catch-up” contributions made by certain high-paid employees earning above $145,000 be characterized as Roth contributions (i.e., contributions made on an after-tax basis rather than a pre-tax basis).
How Does This Impact My Plan?
Many in the retirement industry consider SECURE 2.0 the largest piece of pension law since ERISA was passed 50 years ago. The legislation allows for exciting new ways to increase your plan’s effectiveness. However, it also comes with new rules to factor into your plan design. As such, it’s important to communicate with your plan’s third-party administrator and financial professional to navigate these changes.