Starting in 2025, there can be new limits on the quantity of compensation that may be deferred underneath nonqualified deferred compensation (“NQDC”) plans. These limits are designed to stop the usage of NQDC plans as a option 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.
Underneath present legislation, there is no such thing as a restrict on the quantity of compensation that may be deferred underneath 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 can be based mostly on the worker’s W-2 wages, and they’ll differ relying on the kind of plan. Underneath 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 selection of the reason why employers might wish to take into account making modifications to their NQDC plans earlier than the top of 2024. First, the brand new limits might make it tougher for workers to save lots of for retirement. Second, the brand new limits might make it costlier 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, can be based mostly on the worker’s W-2 wages. Which means that the quantity of compensation that may be deferred underneath an NQDC plan can be restricted to a proportion of the worker’s W-2 wages. The precise proportion will differ 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 the usage of NQDC plans as a option 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 with the intention to keep away from the brand new limits.
The brand new limits are designed to stop the usage of NQDC plans as a option to keep away from taxes on compensation. Underneath present legislation, there is no such thing as a restrict on the quantity of compensation that may be deferred underneath 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 influence on NQDC plans. Employers who’re contemplating making modifications to their NQDC plans ought to seek the advice of with a certified skilled.
3. Affect
The brand new limits on nonqualified deferred compensation (NQDC) plans, which take impact in 2025, can have a big influence on employers and staff. The brand new limits might make it tougher for workers to save lots of for retirement, costlier for employers to supply NQDC plans, and create administrative challenges for employers.
For workers, the brand new limits might make it tougher to save lots of for retirement. Underneath present legislation, there is no such thing as 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 save lots of 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 that staff who’re at the moment deferring a big portion of their revenue may have to scale back their deferrals with the intention to adjust to the brand new limits.
For employers, the brand new limits might make it costlier to supply NQDC plans. Underneath present legislation, employers will not be required to contribute to NQDC plans. Nevertheless, many employers do contribute to those plans with the intention to entice and retain staff. The brand new limits might 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 keep the identical degree of advantages for his or her staff.
The brand new limits may create administrative challenges for employers. Employers might want to monitor the quantity of compensation that’s deferred underneath NQDC plans with the intention to make sure that they’re complying with the brand new limits. This will require employers to make modifications to their payroll programs and procedures.
The brand new limits on NQDC plans are a big change that may have a serious influence on employers and staff. 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’ll 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 stop the usage of NQDC plans as a option to keep away from taxes on compensation.
Query 4: How will the brand new limits have an effect on staff?
The brand new limits might make it tougher for workers to save lots of for retirement. Workers who’re at the moment deferring a big portion of their revenue may have to scale 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 might make it costlier for employers to supply NQDC plans. Employers who want to keep the identical degree of advantages for his or her staff might must contribute a bigger proportion of their very own funds.
Query 6: What ought to employers do to arrange for the brand new limits?
Employers who provide NQDC plans ought to seek the advice of with a certified skilled to debate the brand new limits and the way they’ll have an effect on their plans.
Abstract: The brand new limits on NQDC plans are a big change that may have a serious influence on employers and staff. Employers ought to seek the advice of with a certified skilled to debate the brand new limits and the way they’ll have an effect on their plans.
Transition to the subsequent article part: For extra data 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
Recommendations on 2025 Deferred Comp Limits
Employers and staff 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 the usage of NQDC plans as a option to keep away from taxes on compensation. Employers who provide NQDC plans ought to seek the advice of with a certified skilled to debate the brand new limits and the way they’ll 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 provide NQDC plans ought to begin planning now for the brand new limits. This will contain making modifications to the plan doc, speaking the modifications to staff, and adjusting payroll programs.
Tip 3: Think about different retirement financial savings choices
Workers who’re at the moment deferring a big portion of their revenue into an NQDC plan may have to contemplate different retirement financial savings choices, resembling 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 certified skilled, resembling an accountant or monetary advisor.
Abstract: The brand new limits on NQDC plans are a big change that may have a serious influence on employers and staff. By understanding the brand new limits, planning forward, and contemplating different retirement financial savings choices, employers and staff can decrease the influence of the brand new limits.
Transition to the article’s conclusion: For extra data 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 influence on employers and staff. These limits are designed to stop the usage of NQDC plans as a option to keep away from taxes on compensation.
Employers who provide NQDC plans ought to seek the advice of with a certified skilled to debate the brand new limits and the way they’ll have an effect on their plans. Workers who’re at the moment deferring a big portion of their revenue into an NQDC plan may have to contemplate different retirement financial savings choices, resembling 401(ok) plans or IRAs.
By understanding the brand new limits and planning forward, employers and staff can decrease the influence of the brand new limits. The brand new limits are a reminder that tax legal guidelines are always altering, and it is very important keep up-to-date on the most recent modifications with the intention to make knowledgeable monetary selections.
