ARTICLE | November 06, 2024
Executive summary: 2025 retirement plan and certain fringe benefit limits released
The IRS issued?Notice 2024-80 which made modifications to the annual limits for retirement plans. These limits are updated annually for cost-of-living adjustments. IRS also issued Rev. Proc. 24-40 updating certain additional inflation-adjusted items for 2025.
2025 Limits Relating to Retirement Plans, IRAs and Certain Fringe Benefits
Retirement Plans and individual retirement arrangements (IRAs). Effective Jan. 1, 2025, the following limits apply for qualified retirement plans and IRAs:
|
|
2025 |
2024 |
2023 |
2022 |
|
401(k), 403(b) and 457 elective deferral limit |
$23,500 |
$23,000 |
$22,500 |
$20,500 |
|
Catch-up contribution limit (age 50-59 and 64+) |
$7,500 |
$7,500 |
$7,500 |
$6,500 |
|
Catch-up contribution limit (age 60,61,62,63) |
$11,250 |
– |
– |
– |
|
Annual compensation limit |
$350,000 |
$345,000 |
$330,000 |
$305,000 |
|
Defined contribution plan limit |
$70,000 |
$69,000 |
$66,000 |
$61,000 |
|
Defined benefit plan limit |
$280,000 |
$275,000 |
$265,000 |
$245,000 |
|
Definition of highly compensated employee |
$160,000 |
$155,000 |
$150,000 |
$135,000 |
|
Key employee |
$230,000 |
$220,000 |
$215,000 |
$200,000 |
|
IRA contribution limit |
$7,000 |
$7,000 |
$6,500 |
$6,000 |
|
IRA catch-up contributions (age 50 and older) |
$1,000 |
$1,000 |
$1,000 |
$1,000 |
|
SIMPLE IRA and SIMPLE 401(k) salary deferral limit |
$16,500 |
$16,000 |
$15,500 |
$14,000 |
|
SIMPLE IRA and SIMPLE 401(k) catch-up limit (age 50-59 and 64+) |
$3,500 |
$3,500 |
$3,500 |
$3,000 |
|
SIMPLE IRA and SIMPLE 401(k) catch-up limit (age 60,61,62,63) |
$5,250 |
– |
– |
– |
The 2025 limits reflect some of the smallest year-over-year increases in recent years. Of the limits shown in the table above, the key employee limit is the largest percent increase, followed by the amount used to determine highly compensated employees. No catch-up contribution limits were adjusted this year but changes under the SECURE 2.0 Act of 2022 (the Act) that will take effect in 2025 (described further below) will potentially increase the limitations for catch-up contributions for certain individuals eligible to make these contributions.
Highlights
1. Catch-up contributions are permitted to be made for participants beginning in the year in which they turn age 50. For 2025, the limit on catch-up contributions is $7,500, except in the case of Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) plans for which the limit is $3,500 (both unchanged from 2024). Due to changes under the Act, beginning in 2025, the catch-up limit for most retirement plans is increased to $11,250 for individuals turning 60, 61, 62 and 63 during 2025. For SIMPLE plans, the limit is increased to $5,250. These increased amounts are indexed for inflation after 2025.
2. IRA Phase-outs: Income phase-out ranges for various IRA purposes increased from between $77,000 and $87,000 to between $79,000 and $89,000 for single and head-of-household taxpayers. Similar incremental changes were made to the limits for married filing jointly and married filing separately taxpayers. For more information, refer to Notice 2024-80.
3. The IRA catchup contribution limit for individuals aged 50 and over was amended under the Act to include an annual cost–of–living adjustment but remains- $1,000 for 2025.
4. SIMPLE plans: The amount that may be contributed to SIMPLE retirement plans is increased to $16,500 from $16,000. Due to changes made under the Act, participants in certain SIMPLE 401(k) and SIMPLE IRA plans can take advantage of an increased deferral limit of $17,600 and an increased catch-up limit of $3,850 (both unchanged from 2024) if their employer meets one of the following conditions:
a. has 25 or fewer employees receiving at least $5,000 of compensation, or
b. has more than 25 but not more than 100 employees and makes either a 4% matching contribution or a 3% nonelective contribution.
The catch-up contribution limit may be increased again to $5,250 in the case of plan participants attaining age 60, 61, 62 and 63 during 2025.
Fringe Benefits. Effective Jan. 1, 2025, the following limits apply with respect to certain fringe benefits:
|
|
2025 |
2024 |
2023 |
2022 |
|
Qualified Transportation Fringe (QTF) combined commuter highway vehicle and transit passes (monthly) |
$325 |
$315 |
$300 |
$280 |
|
QTF qualified parking (monthly) |
$325 |
$315 |
$300 |
$280 |
|
Health flexible spending account |
$3,300 |
$3,200 |
$3,050 |
$2,850 |
|
Health savings account (self-only) |
$4,300 |
$4,1580 |
$3,850 |
$3,650 |
|
Health savings account (family) |
$8,550 |
$8,300 |
$7,750 |
$7,300 |
|
Health savings account catch-up |
$1,000 |
$1,000 |
$1,000 |
$1,000 |
Refer to Rev. Proc. 24-40 for a complete list of inflation-adjusted items for 2025.
Takeaway
The limits shown above become effective Jan. 1, 2025. Employers should review these changes and determine whether any updates to their plan administration or documentation are needed. Individual taxpayers should also consult with their tax advisers on how these changes may impact their qualified plan accounts. Any necessary action on behalf of employers to prepare for these limit changes, such as conversations with plan recordkeepers, third-party administrators, or payroll vendors should be completed in the near term. Employers are also reminded that retirement plans that run on a fiscal year should be careful in applying these changes, as some limits are always calendar-year limits (e.g., the elective deferral limit), while other limits apply on a plan-year-beginning basis (e.g., the annual compensation limit).
Let’s Talk
Fill out the form below and we’ll get back to you to discuss your specific situation.
This article was written by Christy Fillingame and originally appeared on 2024-11-06. Reprinted with permission from RSM US LLP.
© 2024 RSM US LLP. All rights reserved. https://rsmus.com/insights/tax-alerts/2024/irs-releases-2025-retirement-and-fringe-benefit-plan-limitations.html
RSM US LLP is a limited liability partnership and the U.S. member firm of RSM International, a global network of independent assurance, tax and consulting firms. The member firms of RSM International collaborate to provide services to global clients, but are separate and distinct legal entities that cannot obligate each other. Each member firm is responsible only for its own acts and omissions, and not those of any other party. Visit rsmus.com/about for more information regarding RSM US LLP and RSM International.
The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.
