On November 1, 2024, the IRS announced the Cost of Living Adjustments (COLAs) affecting the dollar limitations for retirement plans for 2025.
In October, the Social Security Administration announced a modest benefit increase of 2.5%. Retirement plan limits also increased over the 2024 limits. COLA increases are intended to allow participant contributions and benefits to keep up with the “cost of living” from year to year. Here are the highlights from the new 2025 limits:
- The calendar year elective deferral limit increased from $23,000 to $23,500.
- The elective deferral catch-up contribution remains $7,500. This contribution is available to all participants aged 50 or older in 2025. An additional $3,750 is available in 2025 for participants aged 60-63.
- The maximum available dollar amount that can be contributed to a participant’s retirement account in a defined contribution plan increased from $69,000 to $70,000. The limit includes both employee and employer contributions as well as any allocated forfeitures. For those over age 50, the annual addition limit increases to include catch-up contributions.
- The maximum amount of compensation that can be considered in retirement plan compliance has been raised from $345,000 to $350,000.
- Annual income subject to Social Security taxation has increased from $168,600 to $176,100.
|
Annual Plan Limits |
2025 |
2024 |
2023 |
|---|---|---|---|
|
Contribution and Benefit Limits |
|||
|
Elective Deferral Limit |
$23,500 |
$23,000 |
$22,500 |
|
Catch-Up Contributions (age 50-59 and over 63) |
$7,500 |
$7,500 |
$7,500 |
|
Catch-Up Contributions (age 60-63) |
$11,250 |
—– |
—– |
|
Annual Contribution Limit |
$70,000 |
$69,000 |
$66,000 |
|
Annual Contribution Limit including Catch-Up Contributions (age 50-59 and over 63) |
$77,500 |
$76,500 |
$73,500 |
|
Annual Contribution Limit including Catch-Up Contributions (age 60-63) |
$81,250 |
$76,500 |
$73,500 |
|
Annual Defined Benefit Limit |
$280,000 |
$275,000 |
$265,000 |
|
Compensation Limits |
|||
|
Maximum Plan Compensation |
$350,000 |
$345,000 |
$330,000 |
|
Income Subject to Social Security |
$176,100 |
$168,600 |
$160,200 |
|
Key EE Compensation Threshold |
$230,000 |
$220,000 |
$215,000 |
|
Highly Compensated EE Threshold |
$160,000 |
$155,000 |
$150,000 |
|
IRA Limits |
|||
|
SIMPLE Plan Elective Deferrals |
$16,500 |
$16,000 |
$15,500 |
|
SIMPLE Catch-Up Contributions |
$3,500 |
$3,500 |
$3,500 |
|
Individual Retirement Account (IRA) |
$7,000 |
$7,000 |
$6,500 |
|
IRA Catch-Up Contribution |
$1,000 |
$1,000 |
$1,000 |
Preventing Late Deposits
As the time approaches to complete your annual data collection, you may be asked if any deposits to the plan were not made in a timely manner.
Money withheld from a participant’s paycheck as pre-tax deferrals, Roth deferrals or loan repayments must be contributed to the 401(k) or 403(b) plan within the time frame specified by the Department of Labor (DOL). Although the exact requirements can vary depending on the plan, deposits must be made as soon as it is administratively feasible to do so.
What does “as soon as administratively feasible” mean? Essentially, this is the earliest date the money can be separated from company assets. Once you can access the withholdings, they should be deposited. Often, this is the actual pay date. While this is the go-to rule in most cases, smaller plans that start the year with fewer than 100 participants can take advantage of a safe harbor provision in which deposits can be considered timely so long as they are made within 7 business days of withholding. The best practice is to deposit your employees’ deferrals and loan repayments as soon as possible and to be consistent about what that entails. For example, if your processes and procedures allow the deposit to be made on the Monday following a Friday pay date, be sure to follow these same processes every pay period.
Do these late deposit rules also apply to employer contributions? No, employer contributions have different deposit rules. Check with your accountant for tax deduction timing.
Why is this important? Once the money is withheld from a participant’s pay, it becomes a plan asset. The plan exists for the exclusive benefit of the plan participants. When the money stays in the company’s account, it benefits the company instead of benefiting the participants. This is a prohibited transaction because it violates the exclusive benefit rule.
Should I deposit deferrals before the pay date? No, the deferrals and loan payments don’t become plan assets until being withheld from the employee’s paycheck. If the money is contributed to the plan prior to the pay date, the contribution is considered an employer contribution rather than an employee contribution. In addition, the employee contribution will need to be funded in a timely manner. An exception can be made when the individual who usually makes the deposit will be out of the office when the deposit is scheduled, but the situation should be well-documented in case questions arise in the future.
How do I prevent late deposits? The best way to prevent late deposits is to establish procedures and follow them. This should include comparing the amount withheld from payroll to the amount remitted to the plan, as sometimes participants are accidentally left off the contribution upload. In these cases, a simple reconciliation to payroll will prevent a late deposit. If you find you lack the necessary staff to consistently make deposits to the plan, it may be worthwhile to consider services provided by your accountant or payroll company which could handle this on your behalf.
What happens if I make a late payment? The participants will need to be made whole, as if the deposit was never late. The plan sponsor will need to compensate the appropriate participant account(s) with the lost earnings; and for 401(k) plans, a 15% excise tax on the lost earnings will need to be paid. In addition, the late deposits are listed on the Form 5500 and could trigger an audit. There is no minimum limit here, so even if the correction and excise tax are small amounts, the correction still needs to be made.
In summary, even when the correction itself is minor, the effects of a late deposit can be enormous. To avoid the possibility of repercussions, consider your current processes for making deposits to the plan and determine if any adjustments are needed to ensure that your deposits are timely.
Higher Catch-Up Contribution Available in 2025
A catch-up contribution is available for plan participants starting in the year age 50 is reached. For these participants, the annual deferral limit can be exceeded by the catch-up amount. Keep the following in mind:
- The annual deferral limit is based on the participant’s tax year; this is a calendar year limit, even if the plan year is an off-calendar plan year end.
- In order for a plan to accept a catch-up contribution, it must be permitted in the plan document.
For 2024, the deferral limit was $23,000 and the catch-up contribution limit was $7,500, for a total of $30,500. For 2025, the deferral limit is $23,500 and the catch-up contribution limit is $7,500, for a total of $31,000.
As part of SECURE 2.0, a higher catch-up contribution will be available beginning on January 1, 2025, so long as a plan has chosen to adopt the new provision. To take advantage of the higher contribution, a participant must be age 60 to age 63. This contribution stops being available during the calendar year in which the participant reaches age 64.
This means a participant aged 60-63 would have the option to defer $34,750 in 2025 ($23,500 deferral limit plus $11,250 catch-up. If you decide to include this new provision for 2025, it’s important to ensure the payroll provider can track this information and that the participants are aware of the option and complete the necessary election forms.
Those participants aged 50-59 and over 63 are still able to take advantage of the standard catch-up and can defer $31,000 ($23,500 plus $7,500) for 2025.
RMD Reminder
Required Minimum Distributions (RMD) should be paid by December 31 each year to participants who have reached age 73. However, a participant may elect to delay their first distribution until April 1 of the following year. If the first distribution is delayed, two distributions will be paid in the same year.
The plan document may allow participants who are currently employed to delay distributions until termination of employment, although participants who own more than 5% of the company that sponsors the plan are required to take their RMD regardless of employment status. If the participant has died, the distributions could be subject to grandfathered rules and distributions may be required even though the participant hadn’t reached age 73.
RMDs are calculated by combining a life expectancy factor with the account balance on December 31 of the prior year. While the RMD is the minimum distribution that’s needed, more can be withdrawn if requested by the participant and allowed by the plan document.
Retirement plans allow for the delayed taxation of money so that participants can save for retirement. While the intention of the plan is to benefit the participant directly, some individuals may incorporate them into estate planning to reduce their tax liability. For this reason, RMDs force money to be withdrawn from the plan so the government can collect the taxes that had been deferred. As of 2024, RMDs from Roth accounts are no longer required.
If the RMD isn’t taken, excise taxes will need to be paid by the participant, and the plan could be subject to disqualification. For this reason, it’s very important to identify when distributions are required and ensure they are issued on time. Please contact us if you have any questions regarding RMDs for your participants.
Upcoming Compliance Deadlines for Calendar-Year Plans
© 2024 Benefit Insights, LLC. All Rights Reserved.
This newsletter is intended to provide general information on matters of interest in the area of qualified retirement plans and is distributed with the understanding that the publisher and distributor are not rendering legal, tax or other professional advice. Readers should not act or rely on any information in this newsletter without first seeking the advice of an independent tax advisor such as an attorney or CPA.
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Spring will arrive soon, promising new growth and a fresh beginning. It could also be the perfect time to do some spring cleaning for your plan. Let’s look at some areas that you might consider reviewing to ensure your retirement plan is operating efficiently.
Document your processes and procedures to make certain that plan tasks can be handled in case of any absences during an enrollment or pay period. Having a backup in place can prevent errors and delays that could lead to penalties.
Make sure to have a process in place to notify all new enrollments of their eligibility, regardless of whether the plan has automatic enrollment. Depending on the timing for plan entry, including the plan enrollment paperwork with the new hire paperwork could make entry easier for you. Please reach out with any questions regarding when an employee enters the plan.
Deposits of employee deferrals and loan repayments must be submitted to the plan as soon as possible to avoid penalties and corrections. For plans with less than 100 participants, a safe harbor rule allows deposits to be made within seven business days. For larger plans, the expectation is that the money will be deposited more quickly. Depositing these funds on the pay date will avoid the possibility of being late.
Monitoring deferral contribution limits during the calendar year will avoid refunds after year end. Make sure that your payroll is set up to stop deferrals once the limit is reached, including any catch-up contributions for those who have reached age 50.
To keep the plan in compliance, employer contributions must be deposited timely. Due dates are impacted by the type of contributions, required status and tax deductibility. If you have questions on when to deposit your employer contribution or even whether to make an employer contribution, please contact us.
Most plans must be covered by a fidelity bond. The minimum coverage is 10% of plan assets (rounded up to the next $1,000) and the maximum coverage is $500,000. Additional requirements apply to plans with employer securities or non-publicly traded assets. If your fidelity bond is insufficient, now is the time to raise the coverage. Inflation clauses that increase the bond amount as the plan assets increase can ensure that your bond coverage is always adequate. Contact us or your insurance provider if you don’t have a fidelity bond.
Another area to review is communication with participants. Helping your employees understand and trust the plan can increase their contributions. Be sure that your procedures include distributing any plan-related communications—including required participant notices.
Distributions also involve communication, including some of the aforementioned notices. Discussing distribution options with terminated participants, possibly as part of an exit interview, can help to reduce risk of lost participants. We’ll provide instruction on distributions for force-out distributions for small balances, testing corrections and required minimum distributions.
Your plan document is the legal source on how the plan should be administered; operating within its parameters is critical. It’s always worth taking time to review the plan document to ensure that you fully understand and are following its provisions. We’ll cover more details about the plan document later in this newsletter. We’re here to support you in keeping your plan in compliance. Please feel free to reach out with any questions.
Addressing the Challenge of Uncashed Distribution Checks
Uncashed distribution checks present a persistent and often overlooked challenge for retirement plan sponsors. Despite the best efforts of plan administrators, some participants fail to cash their distribution checks, leading to administrative burdens, fiduciary concerns and potential compliance issues. A recent publication by Retirement Management Services (RMS) sheds light on this issue and offers practical guidance for employers seeking to manage and mitigate the risks associated with uncashed checks.
Uncashed checks can arise for various reasons. Participants may have moved without updating their contact information, may not recognize the check as legitimate or may simply forget to deposit it. Regardless of the cause, the responsibility for addressing these uncashed funds ultimately falls on the plan sponsor. This creates a fiduciary obligation to act in the best interest of the participant while ensuring compliance with IRS and Department of Labor (DOL) regulations.
Sponsors are encouraged to maintain up-to-date contact information for all plan participants and to follow up promptly when checks remain uncashed. This may involve sending reminder letters, making phone calls or using certified mail to confirm receipt. In some cases, plan sponsors may also consider using electronic payment methods to reduce the likelihood of checks going uncashed in the first place.
The IRS and DOL have issued guidance on how to handle these situations, including the use of forfeiture accounts and escheatment to state unclaimed property programs. However, these options come with their own set of rules and potential pitfalls. For example, using a forfeiture account may require the plan document to explicitly allow for such treatment. Escheatment laws, which allow the government to assume control of unclaimed property, vary by state. As such, plan sponsors must carefully evaluate their options and consult with legal or compliance experts as needed.
Another important consideration is the documentation of all the efforts made to contact participants and resolve uncashed checks. Maintaining a clear audit trail can help demonstrate fiduciary prudence and protect the plan sponsor in the event of an audit or legal challenge. It is extremely important to have a written policy in place that outlines the steps to be taken when a check remains uncashed beyond a certain period.
By taking a proactive, well-documented and compliant approach, employers can fulfill their fiduciary duties, reduce administrative burdens and ensure that participants receive the benefits they are entitled to.
Source: Retirement Management Services – “Uncashed Distribution Checks” https://www.consultrms.com/Resources/59/Plan-Sponsor-Tips-and-Help/212/Uncashed-Distribution-Checks
Divorce and the Retirement Plan
When a participant in a qualified retirement plan undergoes a divorce, the participant’s account balance may be an asset that is split with the former spouse. As the plan exists for the exclusive benefit of its participants, a court order is required to transfer the participant’s benefits to the ex-spouse. Once approved by the plan administrator, this court order is called a Qualified Domestic Relations Order (QDRO).
The QDRO is a judgment, decree or order that must be issued by a state authority (usually a court). It can be part of the divorce settlement or it may be a separate document. Because of the serious nature of separating the participant’s account balance, the QDRO is more than just an agreement made by both parties — it must also be signed by a judge.
A QDRO will describe how to divide the participant’s account balance between the participant and the ex-spouse, referred to as the alternate payee. In some cases, a set dollar amount will be allocated; in others, a percentage of the account may be designated. In the latter case, the amount assigned to the alternate payee represents the given percentage of the participant’s total vested account balance as of a specified valuation date. This percentage will apply to all sources — such as deferrals, matching or profit sharing — unless specified by the QDRO. Any interest and investment gains/losses that accrue between this valuation date and the date the funds are separated into an account for the alternate payee are often factored into this final calculation. If the participant has outstanding loans, the QDRO will usually indicate how the loans are handled.
Contributions such as deferrals and employer matching made after the valuation date are credited to the participant’s account. Earnings and losses are applied to the account balances. Once the division is complete, the alternate payee’s portion (either dollars or shares) is transferred to an account in the alternate payee’s name.
If the plan allows, the alternate payee may be paid out in a cash or rollover distribution. Not all plan documents allow the alternate payee to receive a distribution before reaching normal retirement age, so it’s important to follow the terms of the plan. In addition, the QDRO cannot violate the provisions of the plan document by requiring a plan to provide an alternate payee or participant with any type or form of benefit not otherwise provided under the plan.
Although the most common situation for a QDRO is a divorce, it can be issued in other situations, such as to a dependent in the case of child support. If the alternate payee is a minor child or legally incompetent, the order can also require payment to the individual with legal responsibility for the alternate payee. If a participant or their attorney provides you with a copy of a divorce decree that references the plan or a QDRO, please contact us immediately, and we will work with you to ensure it meets the requirements of the plan.
Important note for defined benefit plans: For 2025 plan years, PBGC premiums are due one month earlier than usual, specifically on the 15th day of the ninth month after the beginning of the plan year. For calendar year plans, this means the premium is due on September 15, 2025, instead of the usual October 15. This accelerated deadline is due to a provision in the Bipartisan Budget Act of 2015.
Upcoming Compliance Deadlines for Calendar-Year Plans
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