Starting in 2025, there shall be new limits on the quantity of compensation that may be deferred underneath nonqualified deferred compensation (“NQDC”) plans. These limits are designed to forestall the usage of NQDC plans as a technique to keep away from taxes on compensation. Employers could need to make modifications to their NQDC plans earlier than the tip of 2024 to keep away from these new limits.
Beneath present legislation, there isn’t a restrict on the quantity of compensation that may be deferred underneath an NQDC plan. Nonetheless, the Tax Cuts and Jobs Act of 2017 included a provision that may impose new limits on NQDC plans starting in 2025. These limits shall be primarily based on the worker’s W-2 wages, and they’ll range relying on the kind of plan. Beneath 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 could need to think about making modifications to their NQDC plans earlier than the tip 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 modifications 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, shall be primarily based on the worker’s W-2 wages. Which means the quantity of compensation that may be deferred underneath an NQDC plan shall be restricted to a share of the worker’s W-2 wages. The particular share 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 the usage of NQDC plans as a technique to keep away from taxes on compensation. Employers who’re contemplating making modifications to their NQDC plans earlier than the tip 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 tip of 2024 to make modifications to their NQDC plans so as to keep away from the brand new limits.
The brand new limits are designed to forestall the usage of NQDC plans as a technique to keep away from taxes on compensation. Beneath present legislation, there isn’t a restrict on the quantity of compensation that may be deferred underneath an NQDC plan. Nonetheless, the brand new limits will cap the quantity of compensation that may be deferred at a share of the worker’s W-2 wages.
The brand new limits could have a big affect on NQDC plans. Employers who’re contemplating making modifications to their NQDC plans ought to seek the advice of with a professional skilled.
3. Affect
The brand new limits on nonqualified deferred compensation (NQDC) plans, which take impact in 2025, could have a big affect on employers and staff. 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. Beneath present legislation, there isn’t a restrict on the quantity of compensation that may be deferred underneath an NQDC plan. This enables staff to defer a good portion of their revenue, which might scale 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 share of the worker’s W-2 wages. Which means staff who’re presently deferring a big portion of their revenue may have to cut back their deferrals so as to adjust to the brand new limits.
For employers, the brand new limits could make it costlier to supply NQDC plans. Beneath present legislation, employers will not be required to contribute to NQDC plans. Nonetheless, many employers do contribute to those plans so as to appeal to and retain staff. The brand new limits could make it costlier for employers to supply NQDC plans, as they might want to contribute a bigger share of their very own funds so as to preserve the identical stage of advantages for his or her staff.
The brand new limits can also create administrative challenges for employers. Employers might want to monitor the quantity of compensation that’s deferred underneath NQDC plans so as to be sure that they’re complying with the brand new limits. This may increasingly require employers to make modifications to their payroll methods and procedures.
The brand new limits on NQDC plans are a big change that may have a serious affect on employers and staff. 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 are going to 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 primarily based 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 objective of the brand new limits?
The brand new limits are designed to forestall the usage of NQDC plans as a technique to keep away from taxes on compensation.
Query 4: How will the brand new limits have an effect on staff?
The brand new limits could make it tougher for workers to avoid wasting for retirement. Staff who’re presently deferring a big portion of their revenue may have to cut back their deferrals so as 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 stage of advantages for his or her staff could have to contribute a bigger share of their very own funds.
Query 6: What ought to employers do to organize for the brand new limits?
Employers who provide NQDC plans ought to seek the advice of with a professional skilled to debate the brand new limits and the way they are going to have an effect on their plans.
Abstract: The brand new limits on NQDC plans are a big change that may have a serious affect on employers and staff. Employers ought to seek the advice of with a professional skilled to debate the brand new limits and the way they are going to 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 staff ought to concentrate on the brand new limits on nonqualified deferred compensation (NQDC) plans, which take impact in 2025. These limits are designed to forestall the usage of NQDC plans as a technique to keep away from taxes on compensation. Employers who provide NQDC plans ought to seek the advice of with a professional skilled to debate the brand new limits and the way they are going to have an effect on their plans.
Tip 1: Perceive the brand new limits
The brand new limits on NQDC plans are primarily based 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 provide NQDC plans ought to begin planning now for the brand new limits. This may increasingly contain making modifications to the plan doc, speaking the modifications to staff, and adjusting payroll methods.
Tip 3: Think about different retirement financial savings choices
Staff who’re presently deferring a big portion of their revenue into an NQDC plan may have to contemplate different retirement financial savings choices, corresponding to 401(ok) plans or IRAs.
Tip 4: Get skilled recommendation
Employers and staff who’re affected by the brand new limits on NQDC plans ought to seek the advice of with a professional skilled, corresponding to an accountant or monetary advisor.
Abstract: The brand new limits on NQDC plans are a big change that may have a serious affect on employers and staff. By understanding the brand new limits, planning forward, and contemplating different retirement financial savings choices, employers and staff can reduce the affect 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 serious affect on employers and staff. These limits are designed to forestall the usage of NQDC plans as a technique to keep away from taxes on compensation.
Employers who provide NQDC plans ought to seek the advice of with a professional skilled to debate the brand new limits and the way they are going to have an effect on their plans. Staff who’re presently deferring a big portion of their revenue into an NQDC plan may have to contemplate different retirement financial savings choices, corresponding to 401(ok) plans or IRAs.
By understanding the brand new limits and planning forward, employers and staff can reduce the affect of the brand new limits. The brand new limits are a reminder that tax legal guidelines are continually altering, and it is very important keep up-to-date on the most recent modifications so as to make knowledgeable monetary choices.
