Big changes are coming to retirement plans in 2025. Here’s what small businesses should know.

As we near the end of 2024, it’s important for business owners to understand impending changes in retirement plan rules. Doing so may help both them and their employees save more money — and comply with new laws.

Retirement plans are among the most requested employee benefits, 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 choices, but the traditional 401(k) is the most popular. Employee contributions to these accounts are pretax and employers can get a tax deduction for matching those contributions. Traditional 401(k) distributions are taxed and become required at the age of 73.

Also growing in popularity are Roth 401(k) plans, where both employees and their employers — thanks to the 2022 SECURE Act — can make after-tax contributions and have those savings grow tax-free without any distribution requirements later on.

“Retirement plans are an excellent vehicle for reducing an employer’s tax bill while also providing workers with the ability to do exactly what they want with their money,” said Sonya Pappas, a partner at the GSM Advisory Group in 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 plans without failing “discrimination tests.”

Some of my clients have also realized the importance of encouraging employees to save, so they don’t end up in the awkward position of having an employee need additional financial help at retirement.

Here are the changes in store for 2025.

Required enrollment

Thanks to 2022′s SECURE 2.0 legislation, employers with plans established after Dec. 29, 2022, must now, as the default, set up employees 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.

Businesses with fewer than 10 employees or that have been operating for less than three years are exempt.

Higher contribution limits

Taxpayers will be able to contribute up to $23,500 to their company’s 401(k) in 2025, which is up from $23,000 in 2024. The total contribution limit from both the employee and their employer also rises to $70,000 in 2025.

Employees over the age of 50 can make an additional “catch-up contribution” of $7,500. And starting next year, employees over 60 can additionally contribute as much as $11,250.

Roth gets 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 grown.

These accounts “provide the benefit of tax-free income in retirement,” said Mitchell Gerstein, a senior tax adviser at Isdaner & Company in Bala Cynwyd. “Unlike individual Roth IRAs, which have income restrictions, Roth 401(k)s from a company are available to anyone whose employer offers them.”

Roth 401(k)s allow higher annual contribution limits than IRAs, Gerstein said, and may include an employer match, enabling 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 the earnings in these accounts are tax-free when withdrawn in retirement, it’s important for them to recognize that forgoing a current-year tax deduction on a traditional 401(k) in order to contribute to a Roth 401(k) can potentially lead to significant long-term benefits.”

Social Security Earnings Test will increase

If you plan on hiring an older workers, know that a portion of the social security payments due to them may be withheld while they’re working for you.

For workers younger than their full retirement age, this applies if they’re making 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 compensation from your company remains below the threshold so they can get their full Social Security benefits.

More part-timer 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 annually for three years. In 2025, the years of service requirement will be reduced to two.

This is an opportunity to enroll more employees into your 401(k) which not only helps them save for retirement, but may also build loyalty and make it easier for them to become full-time workers if the need arises.

Adjusting to new rules

To leverage all of these changes, Gerstein recommends that business owners work with their retirement plan administrators on compliance, plan design, and administration.

“A good administrator or consultant will start with a retirement plan census of detailed employee information, including ages,” he said. “They will also help to evaluate cost, administration, and flexibility to ensure your choice aligns with business objectives and tax strategies.

Pappas tells her clients to evaluate retirement planning yearly.

“It’s extremely important for owners to incorporate their retirement planning into their annual business plans,” she said. “All of these changes are designed to benefit both owners and workers if they’re implemented the right way.”