By Edward “Ed” V. O’Neal, Senior Vice President and Manager, Retirement Plans
Print This Post
As we careen toward the end of 2024 and move into the new year, individuals and business owners may discover that some new retirement provisions becoming effective in 2025 could have a significant impact on their retirement savings and planning goals. The last few years have seen some of the most robust and impactful retirement legislation in more than a decade. In particular, the Setting Every Community Up for Retirement Enhancement (SECURE) Act 1.0 (enacted in 2019), along with the more recent SECURE Act 2.0, introduced retirement provisions focused on expanding retirement plan coverage for employees, enhancing retirement savings and providing employees more ability to access retirement savings, if needed.
Although many provisions in the recent retirement legislation are already effective, such as a new beginning age for required minimum distributions (RMDs) at age 73 and the creation of new tax credits to encourage startup retirement plans for small business owners, the entirety of provisions in the legislation have effective dates ranging between 2023 and 2026. Additionally, the IRS just finalized rules earlier this year for RMDs that will become effective in 2025.
All this new retirement legislation will impact both individuals and business owners looking to establish retirement plans, with some of the key 2025 provisions to be mindful of including:
Impacting Individuals
- The IRS finalized rules relating to RMDs and specifically the SECURE Act provisions surrounding beneficiary RMDs and the 10-year rule. The final regulations largely mirror the 2022 proposed regulations but do include some new proposed provisions. For 2025, a few of the key changes impacting beneficiary RMDs include:
- The automatic waiver of the missed RMD tax penalty will no longer apply, and annual RMDs for those impacted by the “at least as rapidly” rule must be taken. In addition, there will be no extension of the 10-year rule.
- Year-of-death distributions can be taken by any beneficiary. They no longer need to be pro-rated across multiple beneficiaries.
- An automatic waiver of the missed RMD penalty will apply for any year-of-death distributions that were not taken in the year of death if they are taken by either the beneficiary’s tax filing due date the following year, or by the end of the following year.
Impacting Retirement Plan Sponsors
- Beginning in 2025, select participants in SIMPLE, 401(k), 403(b) and governmental 457(b) plans will be permitted to make an enhanced catch-up contribution to these programs. In particular, with 401(k), 403(b) and governmental 457(b) plans, those participants attaining age 60–63 will have the opportunity to increase their catch-up contribution by the greater of $10,000 or 150% of the regular catch-up limit. So, for example, with a 401(k) plan, instead of the normal $7,500 catch-up contribution limit, a participant aged 60–63 will have a catch-up contribution limit of $11,250 (150% of $7,500). And for a SIMPLE plan, the enhanced catch-up limit is the greater of $5,000 or 150% of the regular catch-up limit for SIMPLE plans. So, instead of the normal $3,500 catch-up contribution limit, a participant aged 60–63 will have a catch-up contribution limit of $5,250 (150% of $3,500). These enhanced catch-up limits will be adjusted for inflation in future years. This plan feature aligns with one of the key goals of SECURE Act 2.0 of increasing retirement plan savings.
- SECURE Act 2.0 is requiring all 401(k) and 403(b) plans that were established after 2022 to incorporate automatic enrollment and automatic contribution escalation features in their retirement plans. This requirement applies to plan years beginning after December 31, 2024, unless an exception applies. This new plan provision aligns with another key goal of SECURE Act 2.0 of expanding retirement plan coverage for employees.
- Employee eligibility requirements for 401(k) and ERISA 403(b) plans will experience some changes beginning in 2025. Eligibility requirements for long-term part-time (LTPT) employees were initially addressed under SECURE Act 1.0 but were updated under SECURE Act 2.0. Under these new requirements, any employee working at least 500 hours in each of two consecutive 12-month periods (and also meeting the age requirement of the retirement plan) will be eligible to participate in a 401(k) or ERISA 403(b) plan. The LTPT employee must be provided the opportunity to make elective salary deferral contributions but may not be eligible to receive any employer matching or nonelective contributions. That would be an optional election made by the plan sponsor. This plan feature also aligns with the expanding retirement plan coverage goal of SECURE Act 2.0.
While there is still more clarification and guidance needed from the Department of Labor regarding some of the provisions in the recent retirement legislation, it’s clear that 2025 will bring some significant changes impacting both individuals and retirement plan sponsors. Be sure to consult with your legal and tax advisor to review the impact of these upcoming changes to your personal tax situation, and consult with your retirement plan provider to review any impact on your employer retirement plan.
IMPORTANT DISCLOSURES: The information provided is based on internal and external sources that are considered reliable; however, the accuracy of this information is not guaranteed. This piece is intended to provide accurate information regarding the subject matter discussed. It is made available with the understanding that Benjamin F. Edwards is not engaged in rendering legal, accounting or tax preparation services. Specific questions on taxes or legal matters as they relate to your individual situation should be directed to your tax or legal professional.