The November Monthly Minute kicks off the season of giving with SECURE 2.0 requirements for 2025 and the latest IRS retirement plan cost-of-living adjustments.
2025 Rings In New SECURE 2.0 Requirements
Since its December 2022 passage, we’ve reported repeatedly on SECURE 2.0 (see e.g., January 2023, December 2023 and January 2024 Monthly Minutes). At this time, a brief year end wrap up is in order given 2025 rings in several requirements aimed at enhancing retirement savings opportunities. Below is a summary of key provisions that impact qualified retirement plans beginning in 2025.
1. Long-Term, Part-Time (“LTPT”) Employees
For plan years beginning after December 31, 2024, SECURE 2.0 modifies the rules that apply to LTPT employees to reduce the service requirement for those employees from 3 years to 2 years. SECURE 2.0 also clarified that the 12-month periods beginning before January 1, 2021, are disregarded for both eligibility and vesting purposes for LTPT employees.
2. Catch-Up Increases for Ages 60-63
Starting in 2025, individuals aged 60 through 63 will be allowed to make larger catch-up contributions to their 401(k) plan. The catch-up limit will be increased to the greater of:
- $11,250, or
- 150% of the regular catch-up contribution limit.
3. Roth Treatment of Catch-Ups for High-Paid Employees
As reported in the August 2023 Monthly Minute, in Notice 2023-62, the IRS walked back the SECURE 2.0 rule that required catch-up contributions to be designated as Roth contributions except in the case of employees with compensation of $145,000 or less (indexed), by announcing a 2-year administrative transition period to 2026. However, plans should prepare for this 2026 requirement in 2025 to ensure compliance.
4. Automatic Enrollment and Escalation
Beginning in 2025, automatic enrollment and automatic escalation will be required for most 401(k) plans established after December 29, 2022. Specifically, plans will need to automatically enroll eligible employees at a contribution rate of at least 3% of their compensation, increasing annually by 1% up to a maximum of 10%, unless the employee elects otherwise.
KMK Comment: Although plan amendments to reflect compliance with SECURE 2.0 are generally not required until December 31, 2026, operational compliance is required on a more timely basis. Be sure to work with your legal counsel, payroll providers and benefits team to confirm compliance with SECURE 2.0 for 2025 and beyond.
2025 Retirement Plan Cost-of-Living Adjustments
In Notice 2024-80, the IRS posted cost-of-living adjustments for qualified retirement plans. Highlights include:
- An increase in the annual contribution limit for employees who participate in 401(k), 403(b), and governmental 457 plans from $23,000 to $23,500.
- The catch-up contribution limit that generally applies for employees aged 50 and over who participate in most 401(k), 403(b), and governmental 457 plans remains $7,500 for 2025. (Under a change made in SECURE 2.0, a higher catch-up contribution limit applies for employees aged 60, 61, 62 and 63 who participate in these plans. For 2025, this higher catch-up contribution limit is $11,250 instead of $7,500.)
- An increase in the threshold used in the definition of “highly compensated employee” under section 414(q)(1)(B) from $155,000 to $160,000.
- An increase in the threshold under section 416(i)(1)(A)(i) concerning the definition of “key employee” for top-heavy plan purposes from $220,000 to $230,000.
- The annual compensation limitation under sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) is increased from $345,000 to $350,000.
KMK Comment: Be sure to update plan administration documents as well as participant disclosures and communications consistent with the IRS’ latest cost-of-living adjustments.
