Prepare for 2025 Retirement Plan Changes
As 2025 approaches, several important changes to retirement plan rules under ERISA will take effect. Employers and plan sponsors must be prepared to implement these updates to ensure compliance and optimize benefits for participants.
Long-Term, Part-Time Employees Gain Access
Starting January 1, 2025, 401(k) and 403(b) plans must allow long-term, part-time employees to make salary deferrals. These employees are defined as non-union workers who have:
- Completed at least 500 hours of service in two consecutive years.
- Met the plan’s age requirements.
Although these employees will not qualify for employer contributions unless they meet standard plan eligibility rules, they will earn vesting credit for years in which they log 500 hours of service.
Enhanced Catch-Up Contributions
Participants aged 60 to 63 will benefit from an enhanced catch-up contribution limit of $11,250 in 2025, compared to the regular $7,500 limit for those aged 50 and older. This increase offers older workers nearing retirement an opportunity to boost their savings.
However, beginning in 2026, catch-up contributions for employees earning over $145,000 annually must be made on a Roth basis. This change allows these contributions to grow tax-free and be distributed tax-free, provided certain requirements are met.
Cash-Out Rules and Auto-Portability
Plans will now have the option to cash out balances under $7,000 for participants who leave employment. To simplify the process, auto-portability facilitates the rollover of these balances into the participant’s new employer-sponsored plan unless the participant elects otherwise. This feature aims to minimize lost accounts and consolidate retirement savings.
Plan Amendment Deadline Extended
The IRS has provided an extension for plan amendments to incorporate these changes. Plan sponsors now have until the end of the 2026 plan year to update their plan documents accordingly. This additional time allows for thoughtful planning and implementation.
The 2025 changes bring new opportunities and responsibilities for retirement plans. By staying ahead of these updates, plan sponsors can ensure compliance while enhancing the retirement readiness of their participants.
