Every year, businesses are met with an evolving landscape of regulatory changes that can significantly impact their operations. For business owners and HR professionals, one of the most critical areas to stay informed about is retirement plans – particularly regarding 401(k) plans.
Keeping up with 401(k) compliance updates is not just a matter of staying on the right side of the law—it’s about ensuring your employees have the best possible retirement benefits and maintaining their trust in you as an employer.
In this blog post, we’ll explore the pivotal updates to 401(k) regulations coming in 2025 to help your company remain compliant and offer competitive benefits packages.
401(k) Updates in 2025
The upcoming year brings several key changes to the way 401(k) plans are managed. These updates aim to expand coverage, enhance employee engagement, and make it easier for employees to utilize these benefits.
Here’s what you need to know:
Mandatory Coverage for Long-Term Part-Time Employees
For plan years starting after December 31, 2024, long-term part-time (LTPT) employees will be eligible to participate in 401(k) cash or deferred arrangements (CODA) and ERISA-covered 403(b) plans. It intends to provide better retirement savings options for employees who have worked at least 500 hours in two consecutive 12-month periods. This expansion primarily affects businesses that rely heavily on part-time staff, as it ensures these employees have access to retirement savings opportunities previously unavailable to them.
Increase in Catch-Up Contributions for Ages 60-63
Starting in 2025, individuals aged 60 to 63 will see an increase in the catch-up contribution limit for 401(k) plans. Currently set at $7,500, the limit will rise to $10,000. This increase is not limited to 401(k) plans but extends to SIMPLE IRAs, allowing eligible participants to contribute an additional $3,500, raising the limit from $16,000 to $19,500. This adjustment acknowledges the unique financial challenges faced by those nearing retirement age and provides an opportunity for them to bolster their savings during these crucial years.
Automatic 401(k) Enrollment
For plans established after December 29, 2022, automatic enrollment becomes mandatory by 2025, unless specific exceptions apply. The initial contribution rate must be set between 3% and 10%, with an automatic increase of 1% each year until it reaches at least 10% but not more than 15%. Employees have the flexibility to adjust their contribution rate or opt-out entirely by electing a 0% contribution rate. Automatic enrollment aims to increase employee participation in retirement savings plans, removing the inertia barrier and nudging employees towards financial security.
Updates to 10-Year Rule for Inherited IRA
The rules surrounding inherited Individual Retirement Accounts (IRAs) are also changing. For IRAs inherited after January 1, 2020, beneficiaries must withdraw the entire account balance by December 31 of the 10th full calendar year following the original owner's death. However, exceptions exist for certain beneficiaries, such as surviving spouses, children of the decedent under 21, beneficiaries not more than 10 years younger than the decedent, and individuals who are disabled or chronically ill. These exceptions allow certain beneficiaries to continue utilizing the Stretch IRA strategy, spreading withdrawals over their lifetime.
Inherited IRA RMD Penalties Go into Effect
The final rules governing Required Minimum Distributions (RMDs) for inherited IRAs will come into effect in 2025. Starting then, a 25% penalty will be assessed for those who fail to take their RMD. This penalty underscores the importance of understanding the specific requirements associated with inherited retirement accounts and ensuring timely withdrawals to avoid financial penalties.
Check Local Regulations for Further Trends
While federal updates form the backbone of compliance, it’s crucial for business owners and HR professionals to stay informed about local regulations that may impact their operations. Different states and localities might implement unique changes that affect employee benefits and payroll processes. For example, Alabama recently amended its overtime tax exemption rules to specify different types of overtime pay, with the changes remaining active until June 30, 2025, unless extended.
Staying updated with these local nuances requires vigilance and a proactive approach to understanding state-specific legislation. Monitoring local government websites, subscribing to regulatory newsletters, and engaging with industry associations can be valuable strategies for keeping abreast of these changes.
Partner with Experts for Your HR Adjustments
Navigating the complex landscape of 401(k) compliance updates and local regulations can be daunting. To ensure your company remains compliant and optimizes its retirement offerings, consider partnering with HR experts like those at PRemployer. These professionals specialize in staying current with regulatory changes and can provide tailored guidance to help you make proactive adjustments to your HR policies – or help you establish your 401(k) altogether.
An HR partner can offer valuable insights into best practices, assist with plan administration, and ensure your company’s retirement benefits align with both federal and local regulations. By leveraging their expertise, you can focus on what matters most—running your business and supporting your employees.
Reach out today to learn more about how PRemployer can help you stay on top of your 401(k) compliance needs!
