2025 Adjsted Dollar Limits for 401(k) Plans Released by IRS

On November 1, 2024, the IRS released its annual notice, Notice 2024-80, setting forth the various dollar limitations for contributions and benefits under qualified retirement plans, including 401(k) plans. The new limits will go into effect on January 1, 2025.

Under the Internal Revenue Code, these limits are subject to annual adjustment to reflect increases in the most recent cost-of-living index. Most years, including this one, certain limits are increased while other limits remain unchanged. (To compare the changes with last year’s limit adjustments, see our blog.)

401(k) Adjusted Limits That Increase in 2025

The most frequently encountered dollar limits for most 401(k) plans, that will increase in 2025 from the parallel dollar limits that are in effect for 2024, are as follows:

• Elective Deferrals. The dollar limit for employee 401(k) elective deferral contributions is increased from $23,000 in 2024 to $23,500 in 2025.
• Plan Compensation. The maximum amount of compensation that may be taken into account for qualified plan (including 401(k) plan) purposes is increased from $345,000 in 2024 to $350,000 in 2025.
• Annual Additions. The maximum contribution limit on “annual additions,” which takes into account both employer and employee contributions under defined contribution plans (including 401(k) plans), is increased from $69,000 in 2024 to $70,000 in 2025.
• “Highly Compensated Employees.” The dollar limit threshold for determining who is a “highly compensated employee” for 401(k) plan nondiscrimination testing purposes is increased from $155,000 in 2024 to $160,000 in 2025.
• “Key Employees.” The dollar limit threshold for determining who is a “key employee” for purposes of determining whether a 401(k) plan is “top-heavy” (another type of nondiscrimination test) is increased from $220,000 in 2024 to $230,000 in 2025.

“Catch-Up” Contributions

Notably, the maximum dollar limit for “catch-up” 401(k) contributions, which generally applies to employees who reach age 50 or older at any time during the calendar year, remains unchanged from the parallel dollar amount in effect for 2024, at $7,500 in 2025.

IMPORTANT! Under the SECURE 2.0 Act, a special, higher catch-up contribution limit applies for employees who attain age 60, 61, 62 or 63 by the end of the applicable year, starting in 2025. The limit is the greater of (i) $10,000; or (ii) 150 percent of the standard limit (i.e., $7,500 for 2025). Accordingly, for 2025, this special, higher catch-up contribution limit is $11,250, meaning that, subject to plan provisions, participants who attain age 60, 61, 62 or 63 by the end of 2025 may contribute a maximum of $11,250 (instead of $7,500) as a catch-up contribution. This is on top of the regular elective deferral limit of $23,500 for a total of $34,750 (both regular and catch-up) in 2025.

Other Adjusted Limits for 2025

In addition to the above adjustments that pertain directly to 401(k) plans, Notice 2024-80 also makes certain other retirement plan-related adjustments for 2025, including adjustments to the dollar limits that apply to:

• Defined benefit retirement plans;
• Individual retirement accounts (“IRAs”);
• “Roth” IRAs;
• Code Section 403(b) plans
• Governmental plans;
• Employee stock ownership plans (“ESOPs”);
• Simplified employee pensions (“SEPs”);
• “SIMPLE” retirement plans;
• Multiemployer plans; and
• Determinations as to the Retirement Savings Contributions Credit for low-income and moderate-income level employees.

Social Security Taxable Wage Base for 2025

In a separate press release the U.S. Social Security Administration (“SSA”) announced on October 10, 2024 that the Social Security taxable wage base will increase from $168,600 in 2024 to $176,000 in 2025. Once an employee reaches this annual limit, his or her additional wages are no longer subject to Social Security withholding, though they can still count as “compensation” for retirement plan purposes, up to the annual compensation cap ($350,000 in 2025), subject to plan provisions.

ACTION REQUIRED!

 Plan administrators, Human Resources personnel, payroll managers, and others affected by the adjusted limits should make sure that their systems are timely updated to reflect the 2025 changes, and to inform employees about the new 2025 dollar limits in all relevant communications (for example, year-end open enrollment materials).

Summary plan descriptions (“SPDs”), plan guidelines and administrative procedures, and similar resources also will need to be reviewed and revised, as required. Notably, most plan documents themselves do not require formal amendments to reflect the adjusted limits. If you are in doubt, please ask your ERISA attorney or advisor to review your plan document for any needed changes.