The landscape of 401(k) plans is set to undergo significant changes in 2025, due to provisions of the SECURE Act 2.0. To ensure smooth transitions and continued compliance it is important to stay ahead of these changes. One of the most notable shifts pertains to catch-up contributions, specifically for participants aged 60 to 63. Here, we’ll delve into the current rules, the impending changes, the steps required for Plan Sponsors, the potential pros and cons of these new regulations, and a small look ahead at how catch-up contributions are set to further evolve in the years ahead, as a result of SECURE Act 2.0.

Under the existing Internal Revenue Service (IRS) guidelines, individuals aged 50 and older are allowed to make additional “catch-up” contributions to their 401(k) plans. This provision is designed to help those closer to retirement age boost their savings in a tax-advantaged manner, recognizing that many may not have saved enough during their earlier working years. In 2024, the catch-up contribution limit is $7,500.

Starting in 2025, the SECURE Act 2.0 introduces a new tier for catch-up contributions. Specifically, individuals aged 60 to 63 will be permitted to contribute up to a higher catch-up limit that will be the greater of $10,000 or 150% of the regular catch-up limit for 2025, which the IRS will announce later this year. This higher limit aims to provide an extra boost for retirement savings during a critical period when individuals are likely to be in their peak earning years and can potentially save more.

• Enhanced Retirement Savings: One of the primary benefits of this change is the opportunity for individuals to significantly increase their retirement savings. Many people, for various reasons, find themselves behind in their retirement planning. The higher catch-up contribution limit for those aged 60 to 63 allows for a concentrated effort to build a more substantial nest egg.
•  Tax Advantages: By enabling higher contributions, individuals can take further advantage of the tax benefits associated with 401(k) plans. Increased pre-tax contributions can lower taxable income, providing a valuable tax break during high-earning years.

• Administrative Complexity: Plan Sponsors will need to ensure participants who qualify for the higher catch-up limit at ages 60 to 63 revert to the standard limit when they turn 64, which could involve additional tracking and communication efforts to prevent over-contributions.
• Recordkeeping Challenges: Retirement plan recordkeeping systems will need to be updated to accommodate these changes. This might be particularly challenging for plans that allow participants to specify a flat dollar deferral amount. Ensuring compliance and preventing errors in contribution limits as participants age will necessitate sophisticated system adjustments and vigilant oversight (payroll systems will also need to be reviewed and monitored, especially if payroll and recordkeeping systems are integrated).
• Participant Confusion: Communicating these changes effectively to plan participants is crucial. Clear and consistent communication along with educational resources will be essential to help participants understand and maximize their benefits under the new rules.

1. Plan Document Amendments: This involves updating the plan’s provisions to reflect the new contribution limits and ensuring compliance with IRS regulations.
2. System Adjustments: This might include modifications to the software that tracks participant ages and contribution levels, ensuring accurate application of the new limits. It is advisable that plan sponsors inquire with their recordkeeper to ensure compatibility, before they implement any changes.
3. Communication Strategies: Plan sponsors should develop clear, concise materials explaining the new contribution limits, and any necessary actions participants need to take. Educational resources and FAQs can help minimize confusion and ensure participants understand the changes.
4. Administrative Processes: This includes verifying that participants aged 60 to 63 are making contributions within the new limits and reverting to the standard limit when participants turn 64.

The changes in 2025 are just the first step in a gradual evolution of catch-up contributions under SECURE Act 2.0. Starting in 2026, certain high earners will be required to make their catch-up contributions on a Roth basis, meaning contributions will be made with after-tax dollars. This shift underscores the need for plan sponsors to stay vigilant and adaptable, as more changes are on the horizon.

The upcoming changes to catch-up contributions under the SECURE Act 2.0 present both opportunities and challenges for 401(k) plan sponsors and participants. While the increased limits for those aged 60 to 63 offer a valuable chance to boost retirement savings, the administrative and communicative demands cannot be overlooked.

For companies overseeing their 401(k) plans, now is the time to review systems and processes, update communication strategies, and ensure that you are ready to navigate the complexities of the SECURE Act 2.0. By doing so, you can help your employees maximize their retirement savings and secure a financially stable future. As Aldrich Wealth prepares for these changes, we continue to stay informed and proactive to ensure that plan participants can fully benefit from these new provisions while maintaining compliance and operational efficiency. If you have any questions, please reach out to a Aldrich Wealth Retirement Plan Consultant.