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Peacock & French CPAs
Dec 01, 2024

As one of the most widely used retirement savings plans, 401(k)s continue to evolve to better meet the needs of employees and employers. With 2025 approaching, here’s what you need to know to stay informed and prepared.

As one of the most widely used retirement savings plans, 401(k)s continue to evolve to better meet the needs of employees and employers. With 2025 approaching, changes to contribution limits and a recent IRS ruling on how 401(k) matching contributions can be applied have captured attention. While the new IRS ruling currently applies only to a single business that requested it, it has the potential to influence broader policy changes in the future. Here’s what you need to know to stay informed and prepared.

Increased Contribution Limits for 2025

The IRS adjusts 401(k) contribution limits annually to account for inflation and rising living costs. For 2025, these limits are set to increase, offering savers more opportunities to invest in their future:

• Employee Contributions: The limit for employee deferrals is expected to increase from $23,000 in 2024 to $23,500 in 2025. This allows employees to set aside more pre-tax or Roth contributions for retirement.
• Catch-Up Contributions: Workers aged 50 and older can make additional “catch-up” contributions. For 2024, this limit is $7,500, and is set to remain the same. However, a higher catch-up contribution is being offered to employees aged 60 to 63. For 2025, the limit for these employees is $11,250 instead of $7,500.
• Total Contribution Limits: The combined limit for employee contributions, employer matches, and any other additions is expected to increase from $68,000 in 2024 to approximately $70,000 in 2025. Employees aged 50 and over will benefit from an even higher total contribution limit when catch-up amounts are factored in.

These increases reflect the ongoing effort to help individuals prepare for retirement in a challenging economic environment.

IRS Ruling on 401(k) Matching Contributions: What’s Happening Now?

In a recent decision, the IRS approved a request from a business to allow 401(k) matching contributions to be tied to student loan payments and other important financial accounts, like HSAs. Under this specific case, the business can make matching contributions to an employee’s 401(k) plan based on their qualified student loan payments, even if the employee does not contribute directly to the retirement plan.

This ruling is groundbreaking for employees who are burdened by student loan debt and unable to contribute to their 401(k). By allowing student loan payments to count as elective deferrals for matching purposes, this approach addresses a common financial challenge for younger workers.

It’s important to note that this ruling applies only to the business that requested it. Other employers are not currently authorized to adopt this practice without specific approval from the IRS. However, the decision sets a precedent that could pave the way for broader changes in the future. While the ruling is currently limited, it signals a shift in how retirement benefits may evolve. Here’s why this development matters to both employees and employers:

• For Employees: If this policy becomes widespread, it could provide relief for millions of workers struggling to balance student loan payments with saving for retirement. Younger workers would no longer have to choose between paying off debt and building long-term financial security.
• For Employers: Forward-thinking businesses should pay attention to this ruling as it could become a trend in the benefits landscape. Offering a student loan-based matching program in the future could enhance recruitment and retention efforts, particularly for companies targeting younger, debt-laden talent.

Preparing for 2025: What Employers Should Do

Employers should stay informed about regulatory developments that may affect their 401(k) plans. Even though the IRS ruling is currently limited, it offers valuable lessons for how companies might adjust their benefits to remain competitive. Here are some steps employers can take:

1. Monitor IRS Updates: Keep a close watch on future guidance or rulings that could extend this policy to a broader range of businesses.
2. Review Current Benefits: Evaluate whether your existing 401(k) program is competitive and consider how student loan-based matching contributions could fit into your long-term strategy.
3. Educate Employees: Communicate upcoming contribution limit increases and other relevant changes for 2025 to help employees make the most of their benefits.
4. Consult with Experts: Work with financial advisors and retirement plan administrators to ensure your offerings remain compliant and forward-thinking.

The changes to 401(k) plans for 2025 bring opportunities and challenges for both employees and employers. Increased contribution limits give savers the ability to invest more toward their retirement goals, while the recent IRS ruling—though limited in scope—signals a potential shift in how retirement plans may evolve to address student loan debt. By staying informed and proactive, businesses and individuals alike can maximize the benefits of 401(k) plans in 2025 and beyond.

To better understand the tax implications of your 401(k) plan—as either an employee or an employer—contact Peacock & French, CPAs today.