29.1 Qualified Plans, 401(k) Limits & Nondiscrimination

Identify the retirement promise

A defined contribution plan maintains individual accounts funded by contributions and investment results. Profit-sharing and many 401(k) arrangements fit this model. A defined benefit plan promises a benefit determined under its formula, with employer funding based on actuarial requirements. A business deduction cannot be computed for both merely by multiplying payroll by the same percentage.

A qualified plan must satisfy applicable requirements concerning its written terms, coverage, benefits, vesting, distributions, and nondiscrimination. Qualification generally allows favorable employer deduction and participant deferral treatment, subject to limits. A nonqualified deferred compensation arrangement does not receive that complete package merely because the employer calls it a pension. Employee inclusion, employer deduction timing, substantial-risk-of-forfeiture rules, and §409A can affect nonqualified arrangements.

Employee salary deferrals in 2025

The basic elective-deferral limit for 401(k) plans is $23,500 for 2025, subject to compensation and plan terms. Traditional pre-tax and designated Roth deferrals share the limit; they are not two separate $23,500 allowances. Elective deferrals to multiple employers' plans generally must be aggregated under the individual's applicable limit, even when the employers are unrelated. Certain plan types, such as governmental 457(b), have separate statutory rules and should not be combined without checking them.

A plan may permit catch-up contributions for a participant age 50 or older by year-end. The ordinary 2025 catch-up is $7,500. For someone attaining age 60, 61, 62, or 63 during 2025, the permitted higher catch-up is $11,250, replacing rather than adding to the ordinary catch-up. A 64-year-old returns to the ordinary catch-up category. These are 2025 limits; later-year inflation adjustments and later-effective Roth catch-up requirements must not silently replace them.

Example: An eligible 62-year-old whose plan permits the higher catch-up can make $23,500 plus $11,250, or $34,750, of 2025 elective deferrals, subject to sufficient compensation and other rules. Adding both $7,500 and $11,250 would double count the catch-up allowance.

Annual additions and employer deductions

For 2025, defined-contribution annual additions generally cannot exceed the lesser of $70,000 or 100% of the participant's compensation. Annual additions include relevant employer contributions, employee contributions other than permitted catch-ups, and forfeitures. The compensation limit generally is $350,000. A business owner cannot evade annual-addition limits by dividing one employer's plan into multiple accounts.

Employer deductions are a different limitation, generally including a 25%-of-compensation limit for employer contributions to defined contribution plans under the applicable rules. Employee elective deferrals are not simply added to employer contributions for that employer 25% deduction test. Distinguish the business's aggregate deduction limit from the annual-additions limit applying to an individual's account.

For an S corporation owner, plan compensation generally comes from qualifying W-2 wages, not shareholder distributions. A sole proprietor or partner uses the self-employed earned-income computation, including the deduction for half of SE tax and the contribution's self-referential adjustment. A pass-through owner does not automatically get a contribution based on every dollar shown on Schedule K-1.

Nondiscrimination and coverage

Qualified plans cannot be designed or operated to disproportionately favor highly compensated employees beyond permitted rules. Coverage tests examine who benefits; contribution and benefit tests examine what they receive. A traditional 401(k) can require ADP and ACP testing of deferrals and matching or employee contributions. A valid safe-harbor design can satisfy specified testing requirements if its contributions, notices where required, and other conditions are met.

A top-heavy plan, generally involving more than 60% of relevant benefits or account balances for key employees under the statutory test, can trigger minimum contributions or benefits for other participants and special vesting rules. Highly compensated employee and key employee are different definitions. Do not classify every owner-related worker identically without checking ownership, compensation, and attribution.

Scenario: A business's owner wants to contribute only for the owner while excluding long-term eligible staff. The plan cannot become an owner-only plan just by omitting those employees from the paperwork. Review eligibility, coverage, common control, and the actual workforce. A one-participant 401(k) is suitable only when its employee facts fit the rules, including any spouse participation.

Official reference

2025 Publication 560 and Notice 2024-80, checked October 17, 2026. Use the notice's 2025 amounts when a summary includes later-year figures.