What happened?

On November 1, 2024, the Internal Revenue Service (IRS) issued updated technical guidance regarding all cost-of-living adjustments affecting dollar limitations for pension plans and other retirement-related items for the tax year 2025.

Quick Summary:

• The document outlines the cost-of-living adjustments for various retirement plan limits for 2025, including increases in contribution limits for 401(k) plans to $23,500 and defined benefit plans to $280,000.

• It also details adjustments for catch-up contributions, SIMPLE plans, and thresholds for highly compensated and key employees.

What are the details?

• Defined Benefit Plans:
  • Annual benefit limit increased from $275,000 to $280,000.
  • For participants separated before January 1, 2025, the limit is adjusted by a factor of 1.0262.

• Defined Contribution Plans:
  • Contribution limit increased from $69,000 to $70,000.

• Elective Deferrals:
  • 401(k) and similar plans: Limit increased from $23,000 to $23,500.
  • Deferred compensation plans (state/local governments, tax-exempt organizations): Limit increased from $23,000 to $23,500.

• Catch-Up Contributions:
  • General catch-up limit for those aged 50+: Remains $7,500.
  • Special catch-up limit for those aged 60-63: $11,250.

• SIMPLE Plans:
  • Salary reduction contributions limit increased from $16,000 to $16,500.
  • Certain other limits remain at $17,600

• Highly Compensated and Key Employees:
  • Highly compensated employee (HCE) threshold increased from $155,000 to $160,000.
  • Key employee threshold for top-heavy plans increased from $220,000 to $230,000.

• Annual Compensation Limitations:
  • The general limit increased from $345,000 to $350,000.
  • The special governmental plan limit increased from $505,000 to $520,000.

• IRA Contributions:
  • The deductible amount remains $7,000.
  • Phase-out ranges for traditional and Roth IRAs adjusted based on income levels.

• Other Adjustments:
  • Various other limits and thresholds adjusted for cost-of-living, including those for simplified employee pensions, employee stock ownership plans, and retirement savings contributions credits.
    
    

Business Considerations

• Inform employees about the new contribution limits and how they can maximize their retirement savings.

• Ensure that all plan documents are updated to reflect the new limits and other relevant changes.

• Review and potentially adjust employer-matching contributions to align with the new limits.

Source References

• IRS Announcement
• IRS Notice 2024-80

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