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2025 Benefit and Contribution Limits for Retirement Plans

TOPC Potentia

January 20, 2025



Many companies provide qualified retirement plans. There are two main types of employer-sponsored retirement plans: defined-benefit plans and defined-contribution plans. Each has distinct characteristics that impact how retirement benefits are calculated and distributed. We would like to provide you with an overview of the comprehensive regulations regarding limits on contributions and benefits.


A defined-benefit plan provides a specific retirement benefit amount when employees retire; while, under a defined-contribution plan such as 401(k) and 403(b), employees contribute a portion of their gross salaries to invest in the funds for retirement over time, and an employer may choose to match the employee contributions.



Defined Benefit Plans

For defined benefit plans, the benefit limits cannot exceed the lesser of $280,000 for 2025 ($275,000 for 2024), or the participant’s average compensation for his or her high-three years of service (HTS). The HTS calculation should include the three consecutive calendar years during which the highest aggregate compensation was received.

 

Example: Participant’s salary for the three consecutive years preceding his/her retirement

Time-Factor-Chart.pdf



Defined Contribution Plans

For defined contribution plans, a plan sponsor may contribute the lesser of $70,000 for 2025 ($69,000 for 2024), or 100 percent of the employee’s compensation. These “annual additions” include employer contributions, employee contributions, and forfeitures. Payments made to restore plan losses from a breach of fiduciary duty under ERISA and other applicable federal and state laws are exempt from the limits on annual additions.

 

Multiemployer Plans

For multiemployer plans, all benefits and annual additions must satisfy the limits on an aggregate basis for all employers. All employers contributing to a multiemployer plan are treated as a single employer when applying the restriction on compensation paid after severance.

 

Additional Regulations and Compliance Considerations The final regulations also provide rules regarding the following:

· cost-of-living adjustments to contribution and benefit limits, which are updated annually to reflect inflation.

· Plan aggregation for companies with multiple plans, to ensure that limits are not exceeded across different plans.,

· Specific rules about the disqualification of plans and trusts, and the definition of the limitation year for compliance purposes.

 

The IRS website also explains the benefit and contribution limits for retirement plans, so if you are interested, please refer to the link below as well.

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