Maximum savers in 401(k) plans may be able to sock away an extra $1,000 in their account next year, if the current estimate from Milliman holds up.
Update: 2025 401(k) Contribution Limits: Milliman Halves its Increase Prediction
The Milliman 2025 IRS Limits Forecast was updated recently using the U.S. Bureau of Labor Statistics (BLS) report published June 12, 2024. The update forecasts a $1,000 boost to this year’s 401(k) elective deferral limit of $23,000, which would bring the 2025 limit to $24,000. For 2024, the elective deferral limit increased by $500 compared to 2023.
When it comes to the total contribution limit, Milliman is forecasting a $2,000 increase from $69,000 this year to $71,000 in 2025. In 2024, the total contribution limit rose by $3,000, from $66,000 in 2023 to $69,000.
Milliman’s limit forecast is projected using two assumption sets. One set is based on the current trailing 12 months of the consumer price index (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).
The CPI as reported by the BLS for the 12 months ended May 31, 2024, was 3.3%, down from 3.4% for the 12 months ended April 30, 2024. It is down slightly from the 3.7% annual change in the 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.
Since September 30, 2023, the CPI has increased about 2.0%. Projecting monthly increases of 0.25% through September 2024 results in an annual increase of 3.1% for Milliman’s eight-month actual/four-month forecast projection.
In addition to the forecasted $1,000 elective deferral limit bump to 401(k), 403(b) and 457 plans, Milliman is forecasting that the catch-up contribution limit for DC plans will increase from $7,500 this year to $8,000 in 2025—with a caveat.
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, Milliman assumes 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.
How 2025 IRS limits will be calculated
Milliman, one of the world’s largest independent actuarial and consulting firms, released its initial forecast in March 2024, which can be found here. It includes information about the limits for qualified retirement plans, how these limits are calculated, how they are affected by SECURE 2.0, and why they may be relevant for certain plan sponsors.
The official 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 Nov. 1, 2023.)
2025 HSA contribution limits already set
While we won’t know the official 2025 401(k) contribution limits until late October or early November, the IRS has already announced 2025 contribution limits for health savings accounts.
The HSA limits are increasing by $150 for individuals and by $250 for individuals with family coverage compared to this year’s limits.
According to IRS Revenue Procedure 2024-25, for calendar year 2025, the annual HSA contribution limit for an individual with self-only coverage under a high-deductible health plan (HDHP) will be $4,300, up from $4,150 in 2024. For an individual with family coverage, the amount will be $8,550, up from $8,300.
The small increase comes on the heels of HSA contribution limits getting their biggest-ever boost in 2024, when the limit jumped from $3,850 in 2023 to $4,150 for individuals and from $7,750 in 2023 to $8,300 in 2024.
2025 COLA forecast down slightly
The 2025 Social Security cost of living adjustment is currently forecast to be in a range from 2.6% to 3%, updated last week after the May CPI data was released.
Starting in July, the CPI figures will actually begin to impact what the 2025 COLA ends up being. The official 2025 COLA will be calculated based on the average rate of inflation using the CPI-W during the third quarter (July, August, and September) of this year, which is compared against the third quarter from the prior year. That final official Social Security COLA raise for next year is expected to be announced on Oct. 10, 2024.
SEE ALSO:
• IRS Bumps 2024 401(k) Contribution Limit to $23,000
• $500 Boost Projected for 2024 401(k) Contribution Limit
• HSA Contribution Limits Increased Slightly for 2025
• 2025 Social Security COLA Forecasts Recede Slightly