401(k) Compliance Requirements for 2025 Mid-Market Employers

Scaling your US workforce beyond 200 employees brings exciting growth opportunities—and a maze of retirement plan compliance requirements that can derail even the most strategic HR leaders. For mid-market companies expanding into the US or growing their American operations, understanding 401(k) requirements isn't just about ticking regulatory boxes; it's about building a sustainable employment strategy that attracts talent while avoiding costly compliance failures.

The stakes are particularly high for companies in regulated industries like financial services, healthcare, and technology, where employment decisions carry material risk and auditors scrutinize every benefit program. With Secure Act 2.0 introducing significant changes for 2025 and beyond, now is the time to ensure your 401(k) strategy aligns with both current regulations and your long-term growth plans.

Key 401(k) Eligibility and Participation Rules for 2025

Understanding who must be offered 401(k) participation forms the foundation of compliance. The rules are more nuanced than many mid-market employers realize, particularly when managing diverse workforces across multiple employment models.

Basic Eligibility Requirements

Employees age 21 or older who have completed one year of service (typically 1,000 hours worked) must be eligible to participate in your 401(k) plan. This isn't optional—once you establish a plan, federal law requires you to extend eligibility to all qualifying employees.

The service requirement can vary slightly based on your plan design, but you cannot require more than one year of service or set the minimum age above 21. Some employers choose immediate eligibility or lower age thresholds to attract talent, but these represent plan design choices rather than legal requirements.

Long-Term Part-Time Employee Changes

Starting in 2025, Secure Act 2.0 expands eligibility to long-term part-time employees who work at least 500 hours per year for two consecutive years. This represents a significant shift for companies with substantial part-time workforces.

These employees must be allowed to make salary deferrals but can be excluded from employer matching contributions if your plan document specifies this exclusion. The change affects workforce planning for retail, hospitality, and other industries with seasonal or flexible staffing models.

International Staff Considerations

For mid-market companies with global operations, US payroll employees—including EU transferees and other international staff—must be considered for 401(k) eligibility if they meet age and service requirements. This often surprises companies transitioning from EOR arrangements to US entities.

Service credit for prior employment (whether with your company or predecessors) may apply depending on your plan's terms. Companies acquiring other businesses or consolidating international operations need to carefully review how service credit rules affect newly eligible employees.

What Is Required for a Business to Offer a 401(k) Plan

Establishing a 401(k) plan involves four critical steps that must be completed before you can begin enrolling employees or processing contributions.

1. Adopt a Written Plan Document

Your plan document serves as the legal foundation for your 401(k) program. It must define eligibility requirements, contribution limits, vesting schedules, and distribution rules while complying with current federal regulations.

The document should specify how you'll handle common scenarios like rehires, breaks in service, and plan loans. Many mid-market companies underestimate the importance of plan document language, only discovering ambiguities when facing employee disputes or audit inquiries.

2. Set Up a Trust and Choose a Custodian

Federal law requires 401(k) assets to be held in trust, ensuring they're used solely for participant benefits. You'll need to select a qualified custodian (typically a bank, insurance company, or investment firm) to hold and invest plan assets.

The trust arrangement establishes fiduciary responsibilities that extend beyond basic recordkeeping. As plan sponsor, you're responsible for prudent selection and monitoring of investment options, even when delegating day-to-day management to service providers.

3. Integrate Payroll and Record-Keeping Systems

Accurate payroll integration ensures timely contribution deposits and proper tax withholding. Your payroll system must be configured to handle pre-tax deferrals, Roth contributions, and employer matching calculations.

Record-keeping requirements extend beyond basic contribution tracking. You'll need systems to monitor eligibility, track vesting, and generate required participant statements and government filings.

4. Provide Required Employee Disclosures

Participants must receive a Summary Plan Description (SPD) that explains plan benefits in plain English. Additional notices may be required for automatic enrollment, safe harbor provisions, and qualified default investment alternatives.

Timeline considerations are crucial—certain notices must be provided before plan entry, while others have annual delivery requirements. Missing disclosure deadlines can result in penalties and participant lawsuits.

Strategic Timing: When a Growing Fintech Added 401(k) Benefits

A 300-employee fintech company expanding from the UK to the US faced pressure from new American hires for retirement benefits. Rather than rushing into the first plan they found, they worked with advisors to time their 401(k) launch strategically.

The decision point came when they realized their EOR arrangement couldn't accommodate the benefit structure they wanted to offer. By coordinating the 401(k) launch with their transition to a US entity, they avoided the complexity of mid-year plan changes while ensuring all eligible employees could participate from day one.

The result: A streamlined benefits package that supported their talent acquisition goals without creating administrative chaos during a critical growth phase.

2025 Contribution Limits, Compliance Testing, and Key Changes

Understanding contribution limits and testing requirements helps you design a plan that serves both highly compensated employees and rank-and-file staff effectively.

2025 Contribution Limits

Employee salary deferrals are limited to $23,500 in 2025, with an additional $7,500 catch-up contribution allowed for participants age 50 and older. Total annual additions (employee deferrals plus employer contributions) cannot exceed $70,000, or $76,500 including catch-up contributions.

The compensation cap for 2025 is $355,000, meaning no more than this amount can be considered when calculating contributions for any individual participant. These limits apply per participant across all plans maintained by controlled group employers.

Nondiscrimination Testing Requirements

Plans must pass annual tests ensuring that highly compensated employees don't receive disproportionate benefits compared to non-highly compensated employees. The Actual Deferral Percentage (ADP) test compares salary deferral rates, while the Actual Contribution Percentage (ACP) test examines employer matching contributions.

Failed tests require corrective action, typically involving refunds to highly compensated employees or additional employer contributions. Safe harbor plan designs can eliminate most testing requirements by providing minimum employer contributions to all eligible employees.

Secure Act 2.0 Implementation Timeline

According to IRS regulations, automatic enrollment becomes mandatory for most new 401(k) plans established after December 31, 2024. Existing plans aren't required to add automatic enrollment, but many employers are adopting it voluntarily to boost participation rates.

The requirement for Roth catch-up contributions for high earners (those earning over $145,000) has been delayed until 2026, giving employers time to update their systems and processes.

Break in Service Complications

Employees who terminate and are later rehired may face complex rules around eligibility and vesting. A "break in service" typically occurs when an employee works fewer than 500 hours in a 12-month period.

Five consecutive one-year breaks in service can result in forfeiture of unvested employer contributions. However, employees must be allowed to buy back forfeited amounts if they return and make up the missed contributions.

Action Steps and Common Compliance Pitfalls

Successful 401(k) administration requires ongoing attention to operational details and regulatory changes that can affect plan compliance.

Essential Action Steps for 2025

Review your plan document for necessary updates reflecting Secure Act 2.0 changes and current contribution limits. Many plans require amendments to address long-term part-time employee eligibility and automatic enrollment requirements.

Audit your payroll and HR systems to ensure accurate eligibility tracking and contribution processing. Pay particular attention to how your systems handle employees who move between different employment classifications or work locations.

Communicate clearly with employees about eligibility changes, contribution limits, and any new plan features. Employees need adequate notice of automatic enrollment provisions and investment default selections.

Cross-Border Coordination Considerations

For companies with international operations, coordinate your US 401(k) with local pension obligations to avoid conflicts or gaps in coverage. EU data protection requirements may affect how you handle participant information for transferred employees.

Consider how currency fluctuations and international compensation structures affect contribution calculations for globally mobile employees. Some companies establish separate benefit programs for different employee populations to simplify administration.

Common Compliance Pitfalls to Avoid

Late deposit of employee contributions represents one of the most frequent violations. Deposits must be made as soon as administratively feasible, typically within a few business days of payroll processing.

Missing required notices or providing them late can result in penalties and participant claims. Establish a compliance calendar that tracks all disclosure deadlines and filing requirements.

Failing to include eligible employees—particularly part-time workers or those in non-traditional employment arrangements—creates both compliance risk and potential discrimination claims.

Not addressing testing failures promptly can compound penalties and create additional administrative burdens. Most failures can be corrected through established IRS programs if addressed quickly.

Avoid Costly Compliance Mistakes

Mid-market companies often discover 401(k) compliance gaps during audits or employee disputes—when correction becomes expensive and disruptive. Teamed's employment specialists can review your current arrangements and identify potential issues before they become problems.

Talk to the experts

Frequently Asked Questions

Does a UK pension count toward US nondiscrimination testing?

No, UK pensions and other international retirement programs are separate from US 401(k) plans and don't affect nondiscrimination testing. However, you should coordinate benefit communications to avoid employee confusion about total retirement benefits.

Can EU remote workers participate in a US 401(k)?

Only if they receive US-source income and meet plan eligibility requirements. EU remote workers paid through local entities or EOR arrangements typically aren't eligible for US 401(k) participation.

How long does setup take for a 500-employee company?

Plan establishment typically takes 90-120 days from initial planning to first payroll deduction. Larger companies may need additional time for system integration and employee communication.

What is mid-market in the context of 401(k) plans?

Mid-market generally refers to companies with 200-2,000 employees or revenue between $10 million and $1 billion. These companies face unique challenges balancing sophisticated benefit needs with operational efficiency.

How does Secure Act 2.0 affect employee communications?

Enhanced notices are required for automatic enrollment, explaining default contribution rates and investment selections. Companies must also communicate expanded eligibility for part-time employees and upcoming Roth catch-up requirements.

What happens to 401(k) eligibility during employment model changes?

Service credit rules vary by plan design, but employees shouldn't lose eligibility when transitioning from contractor to employee status or moving between related companies. Careful planning can avoid coverage gaps during these transitions.

Coordination Success: A Healthcare Company's Multi-Country Approach

A 800-employee healthcare technology company with operations in the US, UK, and Germany needed to harmonize retirement benefits across jurisdictions while maintaining local compliance.

Their challenge: US employees expected 401(k) matching that exceeded what the company offered through UK auto-enrollment pensions. Rather than creating inconsistent benefit levels, they worked with advisors to develop a global total rewards strategy.

The solution involved enhancing UK pension contributions to match US 401(k) value while ensuring each program met local regulatory requirements. The result was a consistent employee experience that supported talent mobility between offices without creating compliance complications in any jurisdiction.

The complexity of 401(k) compliance increases significantly as companies scale beyond 200 employees, particularly for those operating across multiple countries or employment models. Success requires more than understanding the rules—it demands strategic thinking about how retirement benefits fit into your broader talent and compliance strategy.

Whether you're establishing your first US 401(k) plan or optimizing an existing program for 2025 changes, the decisions you make today will affect your company for years to come. Getting it right from the start can save substantial time, money, and administrative headaches as you continue to grow.or