Navigating the New Catch-Up Contribution Limit for 401(k), 403(b), and Governmental 457(b) Plans

Retirement plan administration just got more complicated for 2025. The U.S. Treasury Department has issued proposed regulations that could make plan administration difficult for plan administrators and/or plan sponsors of 401(k), 403(b), and governmental 457(b)plans. In this article, we’ll delve into the highlights and implications of these proposed regulations. 

Background 

On November 27, 2023, the U.S. Treasury Department unveiled proposed regulations under the SECURE 2.0 Act of 2022 to allow a higher catch-up contribution limit for employees aged 60, 61, 62, and 63 who participate in these plans.  For 2025, the higher catch-up contribution limit is $11,250 instead of $7,500.   

Elective deferrals made by a participant in excess of limits imposed under the plan document or by statute are allowed pursuant to IRC Section 414(v) in some cases. These contributions, commonly referred to as “catch-up” contributions, are an optional feature that employers can choose to include in their plans. While the IRS does not mandate the higher catch-up rule for employers, it is advisable for employers to allow the increased limits if their plan already includes catch-up contributions, so that participants may maximize their contributions if they so choose.  

What’s Changed? 

Initially, catch-up contributions are available to individuals aged 50 and over and the contribution limit amount is applied uniformly for all these plans and will increase based on cost of living adjustments each year. However, with the passage of SECURE 2.0, individuals aged 50 and over are now split into two groups: employees aged 60 to 63, and everyone else who is aged 50 and over. Those aged 60 to 63 are qualified for a higher catch-up limit of $11,250 instead of $7,500 for everyone else.  

Key Challenges of the Proposed Regulations 

The proposed regulations create challenges for plan administrators and/or plan sponsors including:

• Timely communication to inform employees who will newly meet or will fall out of the age requirement will be necessary so that employees are informed of the catch-up contribution limit applicable to them for the plan year. 
• The need to monitor employees who will be falling out of the age requirement, so they do not over-contribute to the plan. 
• Potentially higher administration costs to the plan sponsor imposed by their recordkeepers/third-party administrators, who are now required to monitor compliance with this new catch-up limit.    

Conclusion 

As these proposed regulations are in effect, it's important for employers to be proactive. They should discuss the proposed rules with their plan's recordkeeper and payroll provider, evaluate the need for new tracking systems, consider plan design changes, and review service agreements with service providers. For legal advice and implementation matters, employers should consult with their benefits counsel and retirement plan consultant.