by: Alison J. Cohen, Esq.

It’s that time of year again!  Employees are getting ready to make new or updated 401(k) deferral elections.  It is important for plan sponsors to know that, starting as of taxable year January 1, 2025, participants who are eligible to make catch-up contributions may be entitled to contribute even larger amounts to the plan than they could before.  However, this opportunity is not automatic!  Plan sponsors must decide whether to adopt the new provision and make it available to their employees.

Although this new catch-up contribution was created in December 2022 as part of the SECURE 2.0 Act of 2022, the IRS has yet to issue any guidance explaining how the new limits should be administered.  Therefore, even though the law permits this provision to be effective for 2025, there are real concerns with making this available to participants at this time.

At its core, this new catch-up limitation applies to participants who are between ages 60 and 63 as of the end of 2025 (and subsequent years).  In a traditional 401(k) plan, the new rule permits these individuals to make catch-up contributions of up to the greater of $10,000 or 150% of the normal catch-up limitation in place for that year (e.g., using the new 2025 limit, this would be $11,250 – or $3,750 more than the $7,500 catch-up available for other eligible participants).  In a SIMPLE Plan, the adjusted catch-up limitation would be the greater of $5,000 or 150% of the catch-up limitation in place for that year (e.g., using the new 2025 limit, this would be $5,250, or $1,750 more than the $3,500 amount available for other eligible participants).

Example:  Mary and Joe both work for the same company, which sponsors a 401(k) plan.  Mary’s 60^th birthday is October 2, 2025.  For 2025, Mary could elect to make catch-up contributions to her employer’s 401(k) plan in 2025 in the amount of $11,250.  When added to the normal salary deferral limit for 2025 of $23,500, Mary can have total salary deferrals of $34,750.

Joe, on the other hand, will celebrate his 64^th birthday on October 2, 2025.  Because he will be age 64 (i.e., older than 63) at the end of 2025, he is not eligible for the increased catch-up limit.  Therefore, the maximum salary deferrals for him in 2025 will be the normal deferral limit for that year of $23,500, plus the regular catch-up contribution limit of $7,500, for a total of $31,000.

Just because the IRS hasn’t issued guidance by January 2025, doesn’t mean that plan sponsors won’t be able to elect to make this available by the end of the year.  It is important to remember that a participant isn’t eligible to make catch-up contributions until they have first hit a limit or restriction on their regular deferrals, such as the normal legal limit on deferrals (which is $23,500 in 2025), the limit under the ADP test (i.e., the participant is a highly compensated employee whose deferrals are further limited because of the nondiscrimination testing), or a limitation imposed on participants through the plan document.  This means that when the participant makes their first deferral contribution in January, because it hasn’t hit a limit, none of the dollars going into the plan are catch-up dollars.

If you want to implement this new catch-up contribution limitation for 2025, even though the IRS has not yet issued guidance, contact your third-party administrator (TPA) and/or recordkeeper to find out what might be required for you to elect to do so.  The last quarter is always a busy time for your service providers, so the sooner you contact them, the better.  You should also make sure that your payroll provider or system can handle this modification, so that correct amounts are taken from paychecks when the regular deferral limit is hit in 2025 for an affected participant and the time for the new catch-up comes.

If you have questions about the new catch-up contribution limitation or about your retirement plan, please let us know.  We are, after all, your ERISA solution!

What Should You Be Doing Now?

Here’s what is usually happening at this time of the year:

• Required Minimum Distributions (RMD). Participants who have attained either age 70½, or age 72, as applicable, may be required to take their RMDs no later than December 31.  Your TPA and/or recordkeeper should be able to provide you with a list of these individuals.  It is important to make sure you provide approval for the distributions, if required.
• Corrective ADP/ACP Distributions. If your plan failed its ADP/ACP testing for 2023, and you have a calendar year plan, any corrective distribution needed must be completed by December 31.  Even if you timely requested distributions to be processed earlier in the year, you should make sure that you get proof that they were actually paid out of the plan.
• Preparing 2024 Census Data. By the end of January, if you have a calendar year plan, you should complete and provide your census data to your TPA or recordkeeper, along with any additional plan data forms so that your nondiscrimination testing can be completed timely.
• Enrollment Season.  We know HR folks are busy with health and welfare enrollments in the 4^th quarter.  January 1 is also a big enrollment date for retirement plans.  Talk to your financial advisor or other service provider about coordinating enrollment meetings and ordering any enrollment kits you may need.  If you have automatic enrollment, make sure deferrals get timely started for newly eligible participants who don’t opt out.