Starting in 2025, there will probably be new limits on the quantity of compensation that may be deferred beneath nonqualified deferred compensation (“NQDC”) plans. These limits are designed to forestall using NQDC plans as a method to keep away from taxes on compensation. Employers could need to make adjustments to their NQDC plans earlier than the top of 2024 to keep away from these new limits.
Below present regulation, there is no such thing as a restrict on the quantity of compensation that may be deferred beneath an NQDC plan. Nevertheless, the Tax Cuts and Jobs Act of 2017 included a provision that may impose new limits on NQDC plans starting in 2025. These limits will probably be based mostly on the worker’s W-2 wages, and they’re going to range relying on the kind of plan. Below a “specified” NQDC Plan, the restrict on deferrals for 2025 would be the lesser of $30,000 (plus relevant cost-of-living changes) or 15% of the worker’s W-2 wages.
There are a variety of explanation why employers could need to think about making adjustments to their NQDC plans earlier than the top of 2024. First, the brand new limits could make it tougher for workers to avoid wasting for retirement. Second, the brand new limits could make it costlier for employers to supply NQDC plans. Third, the brand new limits could create administrative challenges for employers. Employers who’re contemplating making adjustments to their NQDC plans ought to seek the advice of with a professional skilled.
1. Limits
The brand new limits on nonqualified deferred compensation (NQDC) plans, which take impact in 2025, will probably be based mostly on the worker’s W-2 wages. Which means the quantity of compensation that may be deferred beneath an NQDC plan will probably be restricted to a proportion of the worker’s W-2 wages. The precise proportion will range relying on the kind of NQDC plan.
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Specified NQDC Plans
For specified NQDC plans, the restrict on deferrals for 2025 would be the lesser of $30,000 (plus relevant cost-of-living changes) or 15% of the worker’s W-2 wages.
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Non-specified NQDC Plans
For non-specified NQDC plans, the restrict on deferrals for 2025 would be the lesser of $15,000 (plus relevant cost-of-living changes) or 100% of the worker’s W-2 wages.
These new limits are designed to forestall using NQDC plans as a method to keep away from taxes on compensation. Employers who’re contemplating making adjustments to their NQDC plans earlier than the top of 2024 ought to seek the advice of with a professional skilled.
2. Timeline
The brand new limits on nonqualified deferred compensation (NQDC) plans, which had been included within the Tax Cuts and Jobs Act of 2017, will take impact on January 1, 2025. Which means employers have till the top of 2024 to make adjustments to their NQDC plans with the intention to keep away from the brand new limits.
The brand new limits are designed to forestall using NQDC plans as a method to keep away from taxes on compensation. Below present regulation, there is no such thing as a restrict on the quantity of compensation that may be deferred beneath an NQDC plan. Nevertheless, the brand new limits will cap the quantity of compensation that may be deferred at a proportion of the worker’s W-2 wages.
The brand new limits can have a big impression on NQDC plans. Employers who’re contemplating making adjustments to their NQDC plans ought to seek the advice of with a professional skilled.
3. Impression
The brand new limits on nonqualified deferred compensation (NQDC) plans, which take impact in 2025, can have a big impression on employers and workers. The brand new limits could make it tougher for workers to avoid wasting for retirement, costlier for employers to supply NQDC plans, and create administrative challenges for employers.
For workers, the brand new limits could make it tougher to avoid wasting for retirement. Below present regulation, there is no such thing as a restrict on the quantity of compensation that may be deferred beneath an NQDC plan. This enables workers to defer a good portion of their revenue, which may scale back their present tax legal responsibility and assist them to avoid wasting for retirement. Nevertheless, the brand new limits will cap the quantity of compensation that may be deferred at a proportion of the worker’s W-2 wages. Which means workers who’re at present deferring a big portion of their revenue may have to cut back their deferrals with the intention to adjust to the brand new limits.
For employers, the brand new limits could make it costlier to supply NQDC plans. Below present regulation, employers will not be required to contribute to NQDC plans. Nevertheless, many employers do contribute to those plans with the intention to appeal to and retain workers. The brand new limits could make it costlier for employers to supply NQDC plans, as they might want to contribute a bigger proportion of their very own funds with the intention to preserve the identical degree of advantages for his or her workers.
The brand new limits can also create administrative challenges for employers. Employers might want to monitor the quantity of compensation that’s deferred beneath NQDC plans with the intention to be certain that they’re complying with the brand new limits. This may increasingly require employers to make adjustments to their payroll programs and procedures.
The brand new limits on NQDC plans are a big change that may have a significant impression on employers and workers. Employers who’re contemplating providing NQDC plans ought to seek the advice of with a professional skilled to debate the brand new limits and the way they may have an effect on their plans.
FAQs on 2025 Deferred Comp Limits
The next FAQs present solutions to frequent questions concerning the new limits on nonqualified deferred compensation (NQDC) plans, which take impact in 2025.
Query 1: What are the brand new limits on NQDC plans?
The brand new limits on NQDC plans are based mostly on the worker’s W-2 wages. For specified NQDC plans, the restrict on deferrals for 2025 would be the lesser of $30,000 (plus relevant cost-of-living changes) or 15% of the worker’s W-2 wages. For non-specified NQDC plans, the restrict on deferrals for 2025 would be the lesser of $15,000 (plus relevant cost-of-living changes) or 100% of the worker’s W-2 wages.
Query 2: When do the brand new limits take impact?
The brand new limits on NQDC plans take impact on January 1, 2025.
Query 3: What’s the function of the brand new limits?
The brand new limits are designed to forestall using NQDC plans as a method to keep away from taxes on compensation.
Query 4: How will the brand new limits have an effect on workers?
The brand new limits could make it tougher for workers to avoid wasting for retirement. Workers who’re at present deferring a big portion of their revenue may have to cut back their deferrals with the intention to adjust to the brand new limits.
Query 5: How will the brand new limits have an effect on employers?
The brand new limits could make it costlier for employers to supply NQDC plans. Employers who want to preserve the identical degree of advantages for his or her workers could must contribute a bigger proportion of their very own funds.
Query 6: What ought to employers do to organize for the brand new limits?
Employers who supply NQDC plans ought to seek the advice of with a professional skilled to debate the brand new limits and the way they may have an effect on their plans.
Abstract: The brand new limits on NQDC plans are a big change that may have a significant impression on employers and workers. Employers ought to seek the advice of with a professional skilled to debate the brand new limits and the way they may have an effect on their plans.
Transition to the following article part: For extra info on the brand new limits on NQDC plans, please see the next sources:
- IRS Discover 2023-21
- Division of Labor FAQs on the New Limits on NQDC Plans
- American Institute of CPAs Information to the New Limits on NQDC Plans
Tips about 2025 Deferred Comp Limits
Employers and workers ought to pay attention to the brand new limits on nonqualified deferred compensation (NQDC) plans, which take impact in 2025. These limits are designed to forestall using NQDC plans as a method to keep away from taxes on compensation. Employers who supply NQDC plans ought to seek the advice of with a professional skilled to debate the brand new limits and the way they may have an effect on their plans.
Tip 1: Perceive the brand new limits
The brand new limits on NQDC plans are based mostly on the worker’s W-2 wages. For specified NQDC plans, the restrict on deferrals for 2025 would be the lesser of $30,000 (plus relevant cost-of-living changes) or 15% of the worker’s W-2 wages. For non-specified NQDC plans, the restrict on deferrals for 2025 would be the lesser of $15,000 (plus relevant cost-of-living changes) or 100% of the worker’s W-2 wages.
Tip 2: Plan forward
Employers who supply NQDC plans ought to begin planning now for the brand new limits. This may increasingly contain making adjustments to the plan doc, speaking the adjustments to workers, and adjusting payroll programs.
Tip 3: Take into account different retirement financial savings choices
Workers who’re at present deferring a big portion of their revenue into an NQDC plan may have to contemplate different retirement financial savings choices, equivalent to 401(ok) plans or IRAs.
Tip 4: Get skilled recommendation
Employers and workers who’re affected by the brand new limits on NQDC plans ought to seek the advice of with a professional skilled, equivalent to an accountant or monetary advisor.
Abstract: The brand new limits on NQDC plans are a big change that may have a significant impression on employers and workers. By understanding the brand new limits, planning forward, and contemplating different retirement financial savings choices, employers and workers can reduce the impression of the brand new limits.
Transition to the article’s conclusion: For extra info on the brand new limits on NQDC plans, please see the next sources:
- IRS Discover 2023-21
- Division of Labor FAQs on the New Limits on NQDC Plans
- American Institute of CPAs Information to the New Limits on NQDC Plans
2025 Deferred Comp Limits
The brand new limits on nonqualified deferred compensation (NQDC) plans, which take impact in 2025, are a big change that may have a significant impression on employers and workers. These limits are designed to forestall using NQDC plans as a method to keep away from taxes on compensation.
Employers who supply NQDC plans ought to seek the advice of with a professional skilled to debate the brand new limits and the way they may have an effect on their plans. Workers who’re at present deferring a big portion of their revenue into an NQDC plan may have to contemplate different retirement financial savings choices, equivalent to 401(ok) plans or IRAs.
By understanding the brand new limits and planning forward, employers and workers can reduce the impression of the brand new limits. The brand new limits are a reminder that tax legal guidelines are continuously altering, and it is very important keep up-to-date on the newest adjustments with the intention to make knowledgeable monetary selections.
