As we approach the end of 2024, it is important for business owners to understand the impending changes to retirement plan rules. Doing so can help them and their employees save more money and comply with new laws.
Retirement plans are among the most requested benefits by employees, according to a recent study from the Society for Human Resource Management, along with health insurance and flexible work arrangements.
Employers have many retirement plan options, but the traditional 401(k) is the most popular. Employee contributions to these accounts are pre-tax, and employers can get a tax deduction for matching those contributions. Traditional 401(k) distributions are taxable and become mandatory upon age 73.
Also gaining popularity are Roth 401(k) plans, in which both employees and their employers, thanks to the SAFE Law 2022 – can make after-tax contributions and have those savings grow tax-free without any subsequent distribution requirements.
“Retirement plans are an excellent vehicle for reducing an employer’s tax bill while giving workers the ability to do exactly what they want with their money,” said Sonya Pappas, partner at the GSM Advisory Group at Swarthmore.
When more employees participate in their company’s retirement plan, business owners and their highly compensated executives can make more contributions to their company’s plans without failing “discrimination tests.”
Some of my clients have also realized the importance of encouraging employees to save, so as not to end up in the uncomfortable position of an employee needing additional financial help in retirement.
These are the changes coming for 2025.
Registration required
Thanks to the SECURE 2.0 legislation of 2022, employers with plans established after December 29, 2022 must now, by default, set employees up to contribute to their company’s 401(k) plan, starting at 3%. of their compensation and increasing. 1% each year up to at least 10%.
Employees can still opt out.
Companies with fewer than 10 employees or that have been operating for less than three years are exempt.
Higher contribution limits
Taxpayers may contribute to $23,500 to your company’s 401(k) in 2025, which is an increase from $23,000 in 2024. The total contribution limit of both the employee and his or her employer also goes up to $70,000 in 2025.
Employees over 50 years of age can make an additional “Recovery contribution” of $7,500. And starting next year, employees age 60 and older will be able to contribute up to $11,250 additionally.
Roth becomes popular
Roth 401(k) contribution limits will increase to the same levels as traditional 401(k) limits. Many experts recommend that companies start and contribute to Roth 401(k) plans, and their popularity has increased.
These accounts “provide the benefit of tax-free income in retirement,” said Mitchell Gerstein, senior tax advisor at Isdaner & Company in Bala Cynwyd. “Unlike individual Roth IRAs, which have income restrictions, company Roth 401(k)s are available to anyone whose employer offers them.”
Roth 401(k)s allow higher annual contribution limits than IRAs, Gerstein said, and can include an employer match, allowing both employees and their employers to save more each year.
“Employer Roth 401(k)s are especially advantageous for younger employees, as they are often in a lower tax bracket and have many years for their contributions to grow,” Gerstein said. “Since earnings in these accounts are tax-free when withdrawn in retirement, it is important to recognize that forgoing a current-year tax deduction on a traditional 401(k) to contribute to a Roth 401(k) can potentially lead to significant long-term benefits.”
The Social Security income test will increase
If you plan to hire older workers, know that a portion of the Social Security payments they are owed may be withheld while they work for you.
For workers under their full retirement age, this applies if they earn more than $23,400 in 2025. For workers at full retirement age, the compensation threshold is $62,160. Some workers may want to keep their company compensation below the threshold so they can get their full Social Security benefits.
More part-time participation
Currently, long-term part-time employees can contribute to their employer’s 401(k) plan if they are at least 21 years old and work at least 500 hours a year for three years. In 2025, the years of service The requirement will be reduced to two.
This is an opportunity to enroll more employees in your 401(k), which not only helps them save for retirement, but can also build loyalty and make it easier for them to become full-time workers if the need arises.
Adapt to the new rules
To take advantage of all of these changes, Gerstein recommends that business owners work with their retirement plan administrators on plan compliance, design, and administration.
“A good administrator or consultant will start with a retirement plan census with detailed employee information, including ages,” he said. “They will also help evaluate costs, administration and flexibility to ensure your choice aligns with business objectives and tax strategies.
Pappas tells his clients to evaluate retirement planning annually.
“It is extremely important for owners to incorporate their retirement planning into their annual business plans,” he said. “All of these changes are designed to benefit both owners and workers if implemented correctly.”