Big 401(k) Overhaul: IRS Confirms Major Changes with These Top 4 Updates

Saving for retirement is a key part of every working American’s experience. While most workers will receive at some point their share of Social Security benefits, these will not be enough to cover all the expenses a person will incur during retirement, so being informed about the changes the Internal Revenue Service (IRS) implements to improve savings will be key.

In 2025 there are a few changes coming to 401(k)s and other retirement tools that workers should be aware of so that they can take advantage of as many opportunities to put money away as possible.

1. Contribution limits will increase

401(k)s and other retirement plans have contribution limits, This means that workers cannot put as much money as they want into them as most times the accounts are tax advantaged. To keep up with inflation and the value of the dollar, the IRS increases these contribution limits regularly and 2025 is no exception.

In 2025, the contribution limit for individuals under 50 will increase to $23,500, up from $23,000 in 2024. Savers aged 50 and older can continue to make standard catch-up contributions of $7,500, allowing them to contribute a total of $31,000 annually. These increased limits, especially the one for older individuals, provide an opportunity for all savers to increase their retirement savings and strengthen their financial future. Think that many of these plans are employer matched, so if you contribute the maximum, you will get double your contribution.

2. Catch-up contributions will increase for those ages 60 to 63

As younger workers have a lot of responsibilities and older workers sometimes reach retirement with too little in savings to make a dent in their post work expenses, the IRS has decided to increase contributions for those aged 60 to 63. These are called enhanced catch-up contributions or super contributions and the will allow those closest to retirement to give their savings a last push.

In 2025 this new enhanced catch-up contribution will be $11,250, but regular catch up contributions for those outside that age bracket will remain at $7,500.

3. Employers will be required by the IRS to automatically enroll employees

Many employees forget to do things like enroll in their 401(k) plans, as in many cases you must have some tenure at the company before that option is available to you. Under the new rules, all companies with 11 or more employees will have to automatically enroll new employees in 401(k) plans.

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The change aims to help those who otherwise would not save for retirement, and so the company will select a default rate of between 3% and 10% of their salary for the first year. Again, to ensure that these contributions keep up with inflation and the value of the dollar, these contribution rates will increase by 1% each year, to a maximum of at least 10% but not surpassing 15% of compensation.

This is not a compulsory contribution, workers will be able to opt out and turn their contributions to zero or reduce them significantly, but by making the company implement an automatic process it will help those who are unaware of their options increase their contributions and take advantage of the plans.

4. More part-time workers will become eligible

As we have explained, not every worker is eligible for a 401(k) plan, and while with part time employee’s tenure isn’t always the problem, the number of hours they have worked for a company is often the limiting factor.

In 2024, part-time employees became eligible to join their company’s 401(k) plan if they had worked either 1,000 hours in a single year or at least 500 hours annually for three consecutive years. In 2025, the year requirements will be reduced to two.