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 using NQDC plans as a option to keep away from taxes on compensation. Employers might wish to make adjustments to their NQDC plans earlier than the top of 2024 to keep away from these new limits.
Beneath present legislation, there isn’t any 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 shall be primarily based on the worker’s W-2 wages, and they’re going to differ 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 selection of the explanation why employers might wish to think about making adjustments 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 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, shall be primarily based on the worker’s W-2 wages. Because of this 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 differ relying on the kind of NQDC plan.
-
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.
-
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 option 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 have been included within the Tax Cuts and Jobs Act of 2017, will take impact on January 1, 2025. Because of this employers have till the top of 2024 to make adjustments to their NQDC plans in an effort to keep away from the brand new limits.
The brand new limits are designed to forestall using NQDC plans as a option to keep away from taxes on compensation. Beneath present legislation, there isn’t any 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 share of the worker’s W-2 wages.
The brand new limits may have a major 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, may have a major impression on employers and workers. 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. Beneath present legislation, there isn’t any restrict on the quantity of compensation that may be deferred underneath an NQDC plan. This enables workers to defer a good portion of their earnings, which may cut 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 share of the worker’s W-2 wages. Because of this workers who’re at the moment 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 costlier to supply NQDC plans. Beneath present legislation, employers are usually not required to contribute to NQDC plans. Nevertheless, many employers do contribute to those plans in an effort to appeal to and retain workers. The brand new limits might make it costlier for employers to supply NQDC plans, as they might want to contribute a bigger share of their very own funds in an effort to preserve the identical degree of advantages for his or her workers.
The brand new limits might also create administrative challenges for employers. Employers might want to observe the quantity of compensation that’s deferred underneath NQDC plans in an effort to be sure that they’re complying with the brand new limits. This will likely require employers to make adjustments to their payroll programs and procedures.
The brand new limits on NQDC plans are a major 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’ll have an effect on their plans.
FAQs on 2025 Deferred Comp Limits
The next FAQs present solutions to widespread questions in regards to 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 goal of the brand new limits?
The brand new limits are designed to forestall using NQDC plans as a option 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 tougher for workers to save lots of for retirement. Workers who’re at the moment 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 costlier for employers to supply NQDC plans. Employers who want to preserve the identical degree of advantages for his or her workers might must 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 supply NQDC plans ought to seek the advice of with a professional 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 major 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’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
Tips about 2025 Deferred Comp Limits
Employers and workers 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 using NQDC plans as a option 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’ll 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 supply NQDC plans ought to begin planning now for the brand new limits. This will likely 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 the moment 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 professional skilled, similar to an accountant or monetary advisor.
Abstract: The brand new limits on NQDC plans are a major 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 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 major change that may have a significant impression on employers and workers. These limits are designed to forestall using NQDC plans as a option 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’ll have an effect on their plans. Workers who’re at the moment 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 reduce 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 most recent adjustments in an effort to make knowledgeable monetary choices.
