Pension Plan Limits for Tax Year 2025

The Internal Revenue Service has announced cost-of-living adjustments affecting dollar limitations for pension plans and other retirement-related items for tax year 2025. Many of the pension limitations governing 401(k) plans and IRAs will increase for 2025 because the increase in the Consumer Price Index met the statutory thresholds for their adjustment.

Terms:

• The Elective Deferral Limit is the maximum contribution that can be made on a pre-tax basis to a 401(k), 403(b) or 457(b) plan. This limit includes any after-tax Roth 401(k) contributions if allowed.
• The Annual Defined Benefit Limit is the maximum annual benefit that can be paid to a participant under a defined benefit plan. This limit is actually the lesser of the dollar limit or 100% of the participant’s average compensation.
• The Annual Defined Contribution Limit is the maximum annual contribution amount that can be made to a participant’s account. This limit is actually the lesser of the dollar limit or 100% of the participant’s compensation applied to the combination of employee contributions, employer contributions and forfeitures allocated during the plan year.
• The SIMPLE Deferral Limit is the maximum deferral amount an employee can make to a SIMPLE (Savings Incentive Match Plan for Employees) plan.
• In calculating contribution allocations, a plan cannot consider any employee compensation in excess of the Annual Compensation Limit.
• The Highly Compensated Threshold is the minimum compensation level established to determine highly compensated employees for purposes of nondiscrimination testing.
• The SEP Coverage Limit is the minimum earnings level for a self-employed individual to qualify for coverage by a SEP (Simplified Employee Pension) plan.
• The SEP Annual Compensation Limit is applied in determining the maximum contributions made to the plan.
• The Top Heavy Plan Key Employee Compensation is the annual compensation amount used in the definition of “key employee” in a top-heavy plan.
• Catch-Up Contributions allow individuals aged 50 or over during the calendar year to make contributions in addition to the Elective Deferral Limit and the SIMPLE Contribution Limit.

To view or print the full text of IR-2024-285, November 1, 2024, select this link: https://www.irs.gov/newsroom/401k-limit-increases-to-23500-for-2025-ira-limit-remains-7000.

Should you have questions, please contact your Retirement Advisor.

This brief summary is intended to make you aware of the cost-of-living adjustments for retirement plans recently released by the Internal Revenue Service and is for general informational purposes only. It is provided with the understanding that it does not constitute legal, accounting or other professional services. You are urged to consult your own attorney concerning any specific legal questions you have.