Most years, the only thing we have to worry about when it comes to retirement plan administration is adjusting for the cost-of-living increase to contribution limits. Some years we don’t even have that, but this year is an exception with that, plus major changes you will need to make and consider. So first, the easy stuff. The cost-of-living increase, to the maximum amount an individual can contribute to their 401(k), 403(b), governmental 457 and the Thrift Savings plans, will be increased to $23,500, up from $23,000 in 2024. The catch-up contribution will remain at $7,500 and the limit on annual contributions to an IRA will remain at $7,000, with the $1,000 catch-up contribution.
Now for the big stuff. The SECURE 2.0 Act was signed into law back in December 2022, and while a number of changes took effect in 2023, there are plenty of changes to take effect in future years. These are the three important changes that your plan and service provider will need to be ready for in the next month, taking effect on January 1, 2025:
Mandatory automatic enrollment
With few exceptions, new plans, including those established on or afterDecember 29, 2022, must include an eligible automatic contribution arrangement.
The employer can set the automatic deferral amount between 3% to10% of the employee’s salary. The contribution rate will automatically increase by 1% annually until it reaches the maximum set by the employer, which can be between 10% to 15%.
Exception;: plans adopted prior to December 29, 2022, employers with normally fewer than 11 employees, employers in business for less than 3 years. Government and church plans are also exempt.
The few exceptions to this rule include:
- Businesses that do not normally employ more than ten employees
- Businesses that established a workplace plan before December 29, 2022
- Businesses that have operated for less than three years
- SIMPLE 401(k) plans, governmental and church plans
The plan must allow employees to withdraw automatic contributions (and any earnings) within 90 days of the first contribution without facing the standard 10% penalty on early withdrawals. Additionally, employers must provide plan details to employees, including contribution rates, opt-out procedures and investment options. The participant generally must receive the initial notice at least 30 days, but not more than 90 days before eligibility, to participate in the plan or the first investment. Subject to certain conditions, you may provide the notice to an employee and enroll them in the plan on the first day of work. An annual notice must be provided to participants and all eligible employees at least 30 days, but not more than 90 days, before the beginning of each subsequent plan year.
Long Term Part Time (LTPT) Employees
Under SECURE 1.0, employees with three or more years ( twelve-month periods) of at least 500 hours of service in each year are eligible to participate in a company’s retirement plan.
Under SECURE 2.0, effective January 1, 2025 employees only need a minimum of 500 hours worked in each of two consecutive twelve-month periods.
This means that your plan may need a dual eligibility requirement under which an employee must complete either a one-year of service requirement (1,000 hours of service during the 12-month eligibility service computation period) or the required consecutive years of service in which the employee completes at least 500 hours of service in a twelve-month eligibility service computation period. Of course, employees would still need to meet the plan’s age requirements.
Employees who qualify under this LTPT provision can be excluded from company matching and they can also be excluded from nondiscrimination testing. These will need to be defined in your plan document and communicated to your payroll department/payroll service provider.
With this change, you may want to consider setting up a plan without an hours requirement or 12 months and 500 hours as a requirement. This way you can avoid the hassle of determining the two consecutive years of service rule.
Super Catch-up
Catch-up contributions were introduced in 2001 and are an optional plan addition. This new super catch-up will also be optional for plans that allow catch-up.
Current catch-up is for employees aged 50 or older by the end of the calendar year, and they can contribute an additional $7,500 for 2025. This amount is reviewed for cost of living increases each year.
The super catch-up is ONLY for employees aged 60 through 63 by the end of the calendar year, and the max catch-up is increased to the greater of $10,000 or 150% of the regular catch-up limit. Since the regular catch-up is $7,500 for 2025, that means the super catch-up will be $11,250.
Note that once the employee reaches 64, they are no longer eligible for the super catch-up.
With this change especially, you want to be sure the payroll system or service provider you use will be ready for the super catch-up.
All in all, these are changes you will need time to plan accordingly for, test your systems capabilities and even make changes to your plan documents. These are not things that can be done overnight, so start early to be ready for 2025.
While we make every attempt to ensure the accuracy and reliability of the information provided in this document, the information is provided “as-is” without warranty of any kind. Romeo Chicco or PayMaster, Inc. does not accept any responsibility or liability for the accuracy, content, completeness, legality or reliability of the information contained. Consult with your CPA, Plan Advisor, Attorney, and/or HR Professional as federal, state, and local laws change frequently.
