2025 Insights: 5 Key Changes Shaping the Future of Small Business Retirement Plans

A study in 2024 found that 69% of small employers that offer a retirement plan felt it was their responsibility as the business owner.[1]

There are many reasons to offer a retirement plan solution, but at its core, most employers believe having a plan available to their employees is important. As a business owner, you want to ensure your team can retire comfortably, free from financial stress. Yet, a staggering 89% of small business employees have experienced significant financial stress, with 38% lacking access to employer-sponsored retirement plan.[2] Offering an employer-sponsored retirement plan can greatly benefit both your employees and your business. By providing a retirement plan solution, you not only can enhance their financial security but also boost the morale and loyalty within your business.

As we approach 2025, it is crucial to understand the significant changes on the horizon that could impact your retirement plan. Among the most impactful are the provisions from SECURE 2.0 that go into effect in 2025 which will enhance small business’ ability to offer retirement savings vehicles for their employees as well as provide greater benefits to employees. Additionally, other legislative measures such as state-sponsored retirement plans will affect small business’ ability offer retirement benefits and the types of plans they offer. Staying informed about these changes will empower you as the plan sponsor to make prudent decisions that will impact your employees financial lives.

Here are a few key points to consider as you prepare for these upcoming changes:

1. Mandatory Auto-Enrollment

Starting in 2025, new 401(k) and 403(b) retirement plans will automatically enroll employees as soon as they become eligible. This means that when employees qualify, they will be signed up for the plan without needing to take action. Plans will require to enroll employees at an initial contribution rate between 3% and 10%. Additionally there will be an auto-escalation of feature, which increases by 1% annually until it reaches at least 10% but no more than 15%.

This change, like many other provisions from SECURE 2.0, aims to increase employee participation in their retirement plan. Currently, about 24% of small business employees with an available retirement plan are not enrolled.[2] By making the enrollment automatic, this provision aims to reduce that number and build a retirement savings.

2. Enhanced Tax Credits for Start-Up Plans

Starting and operating a retirement plan for a small business can feel overwhelming, especially when it comes to costs. In fact, 22% of employers cite expenses are a major barrier to setting up and managing a plan.[1] Additionally, 26% of employers would consider offering a plan if it had lower costs.[1] Clearly, cost is a significant factor in the decision to offer an employer-sponsored retirement plan.

Fortunately, there are now enhanced tax credits for start-up plans. Small businesses with up to 50 employees can receive increased federal tax credits to offset the costs of starting a retirement plan. Specifically, they can claim up to $5,000 for administrative expenses during the first three years, plus additional credits for employer contributions.

These enhanced credits, we believe will make a material difference, enabling businesses by removing any one of the greatest barriers for to offering a plan.

3. Update to Catch-Up Contributions Limit

A significant change directly affecting employees is the update to catch-up contribution limitations. Starting in 2025, employees aged 60 to 63 are now able to increase their catch-up contribution limit to 11,250 from the regular limit of 7,500.
This change is particularly important, where a substantial portion of the workforce is nearing retirement age. Of firms with 500 or fewer employees, 26.1% are 50-64 years old and 7.9% are 65 years and older.[3] By allowing employes in this age bracket to contribute greater than the traditional catch-up contribution, it will help those build the necessary funds to potentially retire on time.

4. Expanding Eligibility for Part-Time Workers

Many small businesses rely on the valuable contribution of dedicated part-time employees. Traditionally, these workers have not had access to a retirement plan. However, starting in 2025, SECURE 2.0 will expand eligibility for part-time workers. Part-time employees will now be eligible if they have completed at least 500 hours of service for two consecutive years.

This expanded eligibility is particularly impactful for women, who comprise 63% of the part-time workforce.[4] Historically this demographic has faced challenges in saving for retirement because of lack of accessibility. A report from TIAA indicated that women have approximately 30% lower income in retirement than men.5 By increasing eligibility through employer-sponsored plans small business can help improve retirement security for this workforce.[5]

Moreover, this added flexibility and potential coverage could encourage employees nearing retirement age to consider part-time work or reentering the workforce knowing they will have access to this valuable benefit.

5. State-Sponsored Retirement Plans

In 2025, several states will be implementing state-sponsored retirement plans, with ten states offering a plan, and 25 more proposing similar legislation. Many of these introduced plans will be mandatory for employers who do not offer a retirement plan. States are now taking a proactive approach to ensure the retirement savings gap does not continue. They aim to provide small businesses with the opportunity to offer a retirement plan through the state-run program instead of an employer-sponsored option.
For many small businesses, state-run programs can simplify the decision making and operational process. However, the disadvantage of these types of plans is that they are more one-size-fits-all and do not consider your company’s unique needs. As legislation and regulations evolve, it is crucial for businesses to understand their state options while also considering the opportunities of a unique customized plan with a retirement adviser.

As we move into 2025, small business owners must stay informed about the upcoming changes that could impact their plan. The provisions from SECURE 2.0 and other legislation present significant opportunities to enhance their retirement savings for their employees. By proactively updating and managing their retirement plan, business owners can fulfill their responsibilities while also working to improve overall job satisfaction and retention of their employees. Embracing these changes will help ensure small businesses remain competitive.

Are you interested in learning more about your options for your retirement plan as a small business? Check out this webinar: Empowering Small Businesses: Understanding Your Retirement Plan Options.

To view more about state-sponsored retirement plans check out our guide: State-Mandated Retirement Plans: A Guide for Small Businesses.

Sources:

[1] ShareBuilder401k “Small Business Annual Retirement Trends Survey 2024.”
[2] Financial Health Network’s Research Rport “Boosting Financial Health Benefits in the Small Business Workplace.”
[3] AARP “US Small Business Employement and Older Workers” Fact Sheet.
[4] U.S. DOL “Full-Time / Part-Time Employement” Data.
[5] TIAA “Closing the Retirement Wealth Gap for Women.”

Investment advice offered through OneDigital Investment Advisors LLC. These materials are provided for informational and educational purposes only and do not constitute a recommendation to buy, sell, or hold any security, nor do they constitute legal, accounting, investment, or tax advice.