401(k) Plan Contribution Requirements

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401(k) Plan Contribution Requirements

A 401(k) plan has certain requirements. The plan must be part of a qualified stock bonus plan or profit-sharing plan. (A grandfather clause allows a pre-1974 money purchase pension plan to include 401(k) provisions.) The Employee Retirement Income Security Act was passed in 1974 and altered many rules on pension plans.

Eligibility requirements can be set for minimum age and service (for example, employees 21 and older with 500 hours of service).

Recent legislation affecting 401(k) plans

The Secure Act and the Secure 2.0 Act, recently passed by the federal government, made some notable changes:

The Act guarantees 401(k) plan eligibility for employees who have worked at least 500 hours per year for at least three consecutive years; this means that part-time employees can be eligible. The part-timers must also be 21 years old by the end of the three-year period. The new rule doesn’t apply to collectively bargained employees, though.

In 2025, the work requirement will drop to two years.

Annual lifetime income disclosure statements to plan participants are now required. These statements would show how much a person could receive each month if his or her account balance were used to purchase an annuity.

The law also lets unrelated employers participate in multi-employer retirement plans and have a pooled plan provider administer it.

Contribution limits

Total contributions (employee and employer) are limited to the lesser of 100 percent of the employee’s compensation or $70,000 for 2025. Employer contributions are not required, however, so employers have flexibility in matching their employees’ contributions.

• The maximum employee contribution is $23,500 for 2025. A "catch-up" provision of the law allows taxpayers over age 50 to contribute an additional $7,500.
• If you are 60 to 63 years old, you can now supersize your contributions. Starting in 2025, individuals in this age group can make catch-up contributions up to $11,250 annually to their plan, and that amount will be indexed to inflation.
• As long as all employees are covered by the plan, there is no minimum number of employees needed for a plan to exist. (Employees covered by a collective bargaining agreement may be excluded.)
• Employees are always 100 percent vested (meaning they have the right to take their accumulated pension money out of the fund) in their elective deferrals. Vesting of non-elective (employer) contributions is subject to a schedule depending on the terms of the plan.
• All 401(k) contributions (employer and employee) are deductible by the employer.

IRS approval required

401(k) plans are very flexible, but they must meet IRS requirements to qualify for special tax treatment. These requirements include contribution limits as well as requirements as to how the plan is established and who may participate.