2025 Retirement Plan Contribution and Compensation Dollar Limits
Each year, the IRS makes cost of living adjustments (COLAs) to many of the limits on contributions to, and benefits from, qualified and non-qualified retirement plans. On November 1, 2024, in Notice 2024-80, the IRS announced the 2025 dollar limits. Inflation has leveled off, so we will not see the large increases of years past; however, the increases are welcome, nonetheless. Below is a listing of some common limits to note for the upcoming plan year.
Participant Elective Deferrals
A plan participant may defer up to $23,500 from their salary into a defined contribution retirement plan in 2025 (excluding catch-up contributions), an increase of $500. Note that this amount includes both pre-tax and Roth contributions in aggregate, and it applies to all 401(k), 403(b), and 457(b) plans that an individual participates in for the year.
Catch-up Contributions
If plan provisions allow it, an individual who is age 50 or older in 2025 may make additional “catch-up” contributions of up to $7,500 (no increase from 2024) over and above the $23,500 limit discussed above.
New for 2025, as a result of SECURE 2.0, if plan provisions allow it, an individual who is age 60 to 63 in 2025 may make additional “catch-up” contributions of up to $11,250. This additional catch-up is not available until after a participant has made catch-up contributions for at least one year and has not contributed to a defined contribution plan for at least three years.
Defined Contribution Plan Limit
The maximum annual contribution to an individual’s account in a defined contribution plan (a money-purchase, profit sharing and/or 401(k) plan) cannot exceed the lesser of 100% of the individual’s compensation or $70,000, an increase of $1,000. This amount includes employer contributions, employee 401(k) contributions, and forfeitures.
Annual Compensation Limit
The maximum amount of an employee’s annual compensation which may be used for contribution or benefit calculation purposes is $350,000, up from $345,000 in 2024.
Highly Compensated Employee (HCE) Threshold
Employees are placed either into an HCE group or a non-HCE group for 401(k) plan nondiscrimination tests (i.e., ADP and ACP). An HCE is an employee who:
- Owns more than 5% of the employer at any time during the year or preceding year, or
- Earned more than $160,000 for 2025 ($155,000 in 2024) from the employer and, if the employer elects, had compensation that ranked the employee in the top 20% of all employees.
Key Employee Threshold
Key employee status is used to determine how employees are categorized for the top-heavy test, which measures whether plan assets are concentrated in the accounts of business owners or officers earning a certain amount of compensation. A plan is top-heavy if more than 60% of its assets are held in the accounts of key employees. The determination is made as of the last day of the preceding plan year. For 2025, the compensation paid to an officer that would cause him or her to be classified as a “key employee” is $230,000, a $10,000 increase from 2024.
A Plan for Plan Sponsors
After reviewing the increases in the limits, plan sponsors should:
- Review the 2025 limits with internal payroll staff or payroll service provider to make sure any necessary adjustments are made to incorporate the increased limits.
- Confirm that the correct definition of compensation from the organization’s plan document is being used to determine compensation for plan contributions.
- Identify HCEs and key employees for 2024 and determine whether the increase in compensation thresholds will reduce the number of employees in these groups. If it does, the plan might be more likely to pass the nondiscrimination tests in 2025.
- If a plan fails any 2024 contribution limit or nondiscrimination tests, discuss potential correction options with third-party administrators/service providers. Plan design changes may help a plan pass the necessary testing in the future.
Please contact us if you have questions about the information outlined above; our seasoned and experienced employee benefit plan professionals are here to help. You can also learn more on our Employee Benefit Plan services page.
About the Author
Steph joined McKonly & Asbury in 2016 and is currently a Manager in the firm’s Audit & Assurance Segment. Steph audits a broad spectrum of employee benefit plans, including 401(k), 403(b), retirement, profit sharing, health and… Read more
