Contribution Rules for 401(k) Plans to Change

Significant changes to the catch-up contribution rules for 401(k) plans will be taking effect in 2025 under the recently enacted SECURE 2.0 Act. One change is optional for many plans, however other changes will be mandatory.

New Catch-Up Contribution Rules

The SECURE 2.0 Act introduced new rules for catch-up contributions in 401(k) plans. Starting in 2025, individuals who attain age 60, 61, 62, or 63 during the year will have a higher catch-up contribution limit. This limit will be the greater of $10,000 (indexed for inflation after 2025) or 150% of the regular catch-up limit for 2024. So, for 2025, the catch-up contribution limit for those in the age group would be $11,250, not $7,500, if employers elect to this optional benefit.

Additionally, beginning in 2026, catch-up contributions made by individuals whose prior-year compensation exceeds $145,000 may only be made in the form of designated Roth contributions. This rule applies to employees whose wages for the prior tax year from the plan sponsor or its affiliates equal or exceed $145,000, with no cost-of-living adjustment for 2025. This is a mandatory requirement.

Effective Dates

Employers can use the increased catch-up contribution limits beginning January 1, 2025, but must amend their plan to conform to the new limits by December 31, 2026.

Conclusion

We recommend reviewing your current 401(k) plan provisions and deciding to elect or decline the optional increase. If you have any questions or need assistance in ensuring compliance with the new rules, please do not hesitate to our Employee Benefits Law team.