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November 11, 2024

IRS 2025 Cost of Living Adjustments (COLAs) for Retirement Plans

Overview of 2025 COLA Updates

The Internal Revenue Service (IRS) has announced the 2025 Cost of Living Adjustments (COLAs) for employer-sponsored retirement plans and IRAs. The adjustments update maximum benefits, compensation that can be considered for benefits, and contribution limitations.

These limitations must be followed by law, or retirement plans will be considered non-compliant. Please reach out to your BEI retirement plan consultant for additional information and/or clarification.

2025 Contribution Limits for Retirement Plans

Limit on Participant Contributions Increases from $23,000 To $23,500

This participant contribution limit covers both pre-tax contributions (traditional 401(k)) and after-tax contributions (Roth 401(k)).

Catch-Up Contribution Limit Remains at $7,500

The catch-up contribution is available to any participant who reaches the age of 50 by the end of the calendar year. The combined contribution limit for participants who are eligible for the age-50 catch-up contribution is $31,000.

Catch-Up Contribution Limit Increases for Participants Aged 60-63

Effective 10/1/2025, the SECURE Act increases the catch-up contribution limit to $11,250 for participants aged 60, 61, 62, or 63. The combined contribution limit for these participants is $34,750.

Limit for Participant & Employer Contributions Increases From $69,000 To $70,000

Annual contributions to a 401(k)/Profit Sharing Plan, including participant contributions, employer matching and discretionary contributions, and employer allocations of forfeitures (excluding catch-up contributions), cannot exceed 100% of a participant’s compensation or the government limit, whichever is less.

Compensation and Classification Limits

Defined Benefit Limit Increases from $275,000 to $280,000

This means larger contributions to defined benefit and cash balance plans will now be available.

Participant Compensation Limit Increases from $345,000 to $350,000

This is the maximum compensation that can be considered when calculating both participant and employer contributions.

Compensation Threshold for “Highly Compensated Employees” Increases from $155,000 To $160,000

The IRS requires annual discrimination testing to ensure that participants who earn salaries above this threshold (i.e., “Highly Compensated Employees”) do not disproportionately benefit from their employer’s plan. This is known as the “nondiscrimination” test.

Compensation Threshold for “Key Employees” Increases from $220,000 to $230,000

The IRS also requires annual testing to ensure the value of the account assets of participants who earn salaries above this threshold, known as “Key Employees,” do not exceed certain limits. These limits are 60% of assets in defined contribution plans, and 60% of the benefits in defined benefit or cash balance plans.

Contributions are required for non-key employees for plans exceeding these limits. Generally, this amounts to 3% of all eligible participant compensation in a 401(k)/profit-sharing plan. If an employer sponsors only a defined benefit or cash balance plan, the additional contributions will be built into the annual contribution requirement.

See the Benefit Equity Inc. COLA Table.

You can also view the IRS Notice 2024-84 for a complete list of all COLA adjustments for 2025.

For support to help navigate these new cost of living updates, call your BEI Retirement Plan Consultant at 714-480-1364 or connect with us here.

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