Starting in 2025, there will probably be new limits on the quantity of compensation that may be deferred below nonqualified deferred compensation (“NQDC”) plans. These limits are designed to stop using NQDC plans as a approach to keep away from taxes on compensation. Employers might wish to make modifications 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 below an NQDC plan. Nonetheless, the Tax Cuts and Jobs Act of 2017 included a provision that can 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 the explanation why employers might wish to think about making modifications to their NQDC plans earlier than the top of 2024. First, the brand new limits might make it harder for workers to avoid wasting for retirement. Second, the brand new limits might make it dearer for employers to supply NQDC plans. Third, the brand new limits might create administrative challenges for employers. Employers who’re contemplating making modifications to their NQDC plans ought to seek the advice of with a certified 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 that the quantity of compensation that may be deferred below 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 stop using NQDC plans as a approach to keep away from taxes on compensation. Employers who’re contemplating making modifications to their NQDC plans earlier than the top of 2024 ought to seek the advice of with a certified 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 that employers have till the top of 2024 to make modifications to their NQDC plans in an effort to keep away from the brand new limits.
The brand new limits are designed to stop using NQDC plans as a approach 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 below an NQDC plan. Nonetheless, 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 may have a big impression on NQDC plans. Employers who’re contemplating making modifications to their NQDC plans ought to seek the advice of with a certified skilled.
3. Impression
The brand new limits on nonqualified deferred compensation (NQDC) plans, which take impact in 2025, may have a big impression on employers and workers. The brand new limits might make it harder for workers to avoid wasting for retirement, dearer for employers to supply NQDC plans, and create administrative challenges for employers.
For workers, the brand new limits might make it harder 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 below an NQDC plan. This permits workers to defer a good portion of their earnings, which might cut back their present tax legal responsibility and assist them to avoid wasting for retirement. Nonetheless, 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 that workers who’re at present deferring a big portion of their earnings may have to scale back their deferrals in an effort to adjust to the brand new limits.
For employers, the brand new limits might make it dearer to supply NQDC plans. Below present regulation, employers usually are not required to contribute to NQDC plans. Nonetheless, many employers do contribute to those plans in an effort to entice and retain workers. The brand new limits might make it dearer for employers to supply NQDC plans, as they might want to contribute a bigger proportion of their very own funds in an effort to preserve the identical stage of advantages for his or her workers.
The brand new limits may create administrative challenges for employers. Employers might want to monitor the quantity of compensation that’s deferred below NQDC plans in an effort to make sure that they’re complying with the brand new limits. This will likely require employers to make modifications to their payroll techniques and procedures.
The brand new limits on NQDC plans are a big change that can have a serious impression on employers and workers. Employers who’re contemplating providing NQDC plans ought to seek the advice of with a certified 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 widespread 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 stop using NQDC plans as a approach to keep away from taxes on compensation.
Query 4: How will the brand new limits have an effect on workers?
The brand new limits might make it harder for workers to avoid wasting for retirement. Workers who’re at present deferring a big portion of their earnings may have to scale back their deferrals in an effort to adjust to the brand new limits.
Query 5: How will the brand new limits have an effect on employers?
The brand new limits might make it dearer for employers to supply NQDC plans. Employers who want to preserve the identical stage of advantages for his or her workers might have to 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 certified 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 can have a serious impression on employers and workers. Employers ought to seek the advice of with a certified 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 assets:
- 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 stop using NQDC plans as a approach to keep away from taxes on compensation. Employers who supply NQDC plans ought to seek the advice of with a certified 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 will likely contain making modifications to the plan doc, speaking the modifications to workers, and adjusting payroll techniques.
Tip 3: Think about different retirement financial savings choices
Workers who’re at present deferring a big portion of their earnings into an NQDC plan may have to contemplate different retirement financial savings choices, similar to 401(okay) 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 certified skilled, similar to an accountant or monetary advisor.
Abstract: The brand new limits on NQDC plans are a big change that can have a serious impression on employers and workers. By understanding the brand new limits, planning forward, and contemplating different retirement financial savings choices, employers and workers can decrease 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 assets:
- 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 can have a serious impression on employers and workers. These limits are designed to stop using NQDC plans as a approach to keep away from taxes on compensation.
Employers who supply NQDC plans ought to seek the advice of with a certified 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 earnings into an NQDC plan may have to contemplate different retirement financial savings choices, similar to 401(okay) plans or IRAs.
By understanding the brand new limits and planning forward, employers and workers can decrease the impression of the brand new limits. The brand new limits are a reminder that tax legal guidelines are consistently altering, and it is very important keep up-to-date on the newest modifications in an effort to make knowledgeable monetary choices.
