As plan sponsors prepare for the changes to the limits for their retirement plans and the effects on their labor costs and talent recruitment and retention efforts in 2025, we offer our 2025 Internal Revenue Service (IRS) Limits Forecast.
We published the limits for 2024 back in November 2023 following the announcements by the federal agencies of the annual cost-of-living adjustments, along with the corresponding limits for 2023 and 2022. In this forecast, we estimate the following IRS qualified retirement plan compensation and benefits limits:
- The maximum annual defined benefit (DB) plan annuity payable as a single life annuity.
- The maximum annual addition (contributions) to a defined contribution (DC) plan is the sum of any employee contributions (tax-deferred or Roth) and their employer contributions (matching, profit-sharing, or other nonelective) but excludes catch-up contributions.
- The maximum annual amount an individual participant may defer under a §401(k), §403(b), or §457 plan. SECURE 2.0 permits plan sponsors to elect to treat qualified student loan payments as elective deferrals. Recognition of such loan payments may not exceed this limit—or, if less, the employee’s Internal Revenue Code (IRC) section 415(c)(3) compensation for the year—reduced by the employee’s elective deferrals for the year.
- Catch-up contributions for participants aged 50 and older.
- The compensation limit used in the pension plan’s benefit and contribution formula(s).
- The compensation threshold for highly compensated employees (HCEs).
- The compensation threshold for key employees.
- Portion of emergency savings accounts (ESA) attributable to participant contributions. SECURE 2.0 permits plan sponsors to add ESAs to their DC plans beginning in 2024, allowing non-HCEs to contribute to these accounts on a Roth basis. The portion of the account attributable to participant contributions is limited by law.
- Compensation threshold triggering Roth catch-up contributions. SECURE 2.0 requires plans that offer catch-up contributions to require catch-up contributions only on a Roth basis for participants whose wages (as defined in IRC section 3121[a]) exceed $145,000 (indexed for inflation) in the prior calendar year. The IRS provided a two-year administrative transition period for plans to implement this provision, until December 31, 2025. For this projection, we assumed the $145,000 threshold will be indexed for inflation during the transition period.
New for 2025
SECURE 2.0 permits plans that offer catch-up contributions to increase the catch-up limits for participants aged 60, 61, 62, or 63 beginning in 2025. The limit is the greater of $10,000 or 150% of the regular catch-up limit, as indexed for inflation. For this projection, we assume the limit for 2025 will ultimately be based on the regular catch-up limit in 2025, as noted in the draft technical corrections bill, instead of 2024 as passed in SECURE 2.0.
Please visit our website to learn more about how SECURE 2.0 changes retirement savings. The site contains numerous articles and podcasts to help you navigate the new law.
How the 2025 IRS limits will be calculated
The 2025 IRS limits will be calculated using the 2024 limits and applying a factor that is based on the consumer price index (CPI) in federal fiscal year (FFY) 2024. FFY 2024 is defined as the 12-month period from October 1, 2023, to September 30, 2024.
After the close of FFY 2024, the IRS will use the 12 months of reported CPI to calculate the 2025 IRS limits. (The calculations are more complex than just multiplying the 2024 limits by the CPI, but those details are omitted here.) The 2025 IRS limits could be released by the IRS in October or November 2024. (The 2024 limits were announced on November 1, 2023.)
March 2024 forecast
Our Limits Forecast is projected using two assumption sets. One set is based on the current trailing 12 months of CPI and the second assumes that year-to-date CPI (since September 30, 2023) will continue to increase each month through September 30, 2024, by an estimated 25 basis points (3.0% annual).
Historical rolling 12-month changes in CPI as of each September 30 through 2023, and through March 31 for the current FFY are shown in Figure 1.
Figure 1: Historical 12-month percentage change each September 30, Consumer Price Index, all items, not seasonally adjusted
Source: U.S. Bureau of Labor Statistics.
Inflation in the 12 months ending March 31, 2024, was 3.5% as reported by the U.S. Bureau of Labor Statistics (BLS) on April 10, 2024. This is down slightly from the 3.7% annual change in CPI as of September 30, 2023, but higher than the 2.8% average annual change over the past 10 years and the 2.6% average annual change over the past 20 years.
BLS is expected to release the April CPI results on May 15, 2024, at which time this forecast will be updated.
Please contact your Milliman consultant for details and questions about how these limits apply to your retirement plan(s).
Figure 2: 2025 IRS Limits Forecast Using Actual FFY 2024 CPI as of March 31, 2024
| 2024 IRS limits | Estimated 2025 IRS limits | Dollar increases from 2024 limit | |||
|---|---|---|---|---|---|
| Category of annual IRS limits | Actual 12-month trailing CPI as of 3/31/2024 | 6-month actual 3/31/2024, 6 months forecast to 9/30/2024 | Actual 12-month trailing CPI as of 3/31/2024 | 6-month actual 3/31/2024, 6 months forecast to 9/30/2024 | |
| Maximum annual annuity pension for DB plans | $275,000 | $285,000 | $280,000 | $10,000 | $5,000 |
| Maximum annual addition for DC plans | $69,000 | $71,000 | $71,000 | $2,000 | $2,000 |
| Maximum §401(k), §403(b), §457 deferral for DC plans | $23,000 | $24,000 | $24,000 | $1,000 | $1,000 |
| Catch-up contribution limit for DC plans* | $7,500 | $8,000 Ages 60 to 63: $12,000 |
$8,000 Ages 60 to 63: $12,000 |
$500 $4,500 |
$500 $4,500 |
| Compensation limit | $345,000 | $355,000 | $355,000 | $10,000 | $10,000 |
| HCE dollar amount | $155,000 | $160,000 | $160,000 | $5,000 | $5,000 |
| Key employee/officer compensation | $220,000 | $230,000 | $230,000 | $10,000 | $10,000 |
| Contribution limit to ESAs for DC plans | $2,500 | $2,500 | $2,500 | $0 | $0 |
| Prior year wage threshold triggering Roth catch-up contributions to DC plans | $145,000 | $150,000** | $145,000** | $5,000 | $0 |
* Under SECURE 2.0, plans are permitted (but not required) to increase the catch-up limit for participants aged 60, 61, 62, or 63.
** We assumed this threshold will be indexed for inflation during the 2-year transition period ending December 31, 2025.
Source: https://www.bls.gov/cpi/ retrieved April 10, 2024.
Actual 12-month trailing CPI for All Urban Consumers (CPI-U) of 3.5% ending March 31, 2024.
Actual six-month CPI-U ending March 31, 2024, and 0.25% per month for April through September 2024