Elective Deferrals: Taxable and Nontaxable Income (2025 IRS Guide)

This guide covers “Elective Deferrals” within taxable and nontaxable income. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.

Adapted from Publication 525 (2025), Taxable and Nontaxable Income, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.

Context for these rules

Except for Roth contributions, your employer’s contributions to a qualified retirement plan for you aren’t included in income at the time contributed. (Your employer can tell you whether your retirement plan is qualified.) However, the cost of life insurance coverage included in the plan may have to be included.

If your employer pays into a nonqualified plan for you, you must generally include the contributions in your income as wages for the tax year in which the contributions are made. However, if your interest in the plan isn’t transferable or is subject to a substantial risk of forfeiture (you have a good chance of losing it) at the time of the contribution, you don’t have to include the value of your interest in your income until it’s transferable or is no longer subject to a substantial risk of forfeiture.

Elective Deferrals

If you’re covered by certain kinds of retirement plans, you can choose to have part of your compensation contributed by your employer to a retirement fund, rather than have it paid to you. The amount you set aside (called an elective deferral) is treated as an employer contribution to a qualified plan. An elective deferral, other than a designated Roth contribution (discussed later), isn’t included in wages subject to income tax at the time contributed. However, it’s included in wages subject to social security and Medicare taxes.

Elective deferrals include elective contributions to the following retirement plans.

1. Cash or deferred arrangements (section 401(k) plans).

2. The TSP for federal employees.

3. Salary reduction simplified employee pension plans (SARSEP plans).

4. Savings incentive match plans for employees (SIMPLE plans).

5. Tax-sheltered annuity plans (section 403(b) plans).

6. Section 501(c)(18)(D) plans. (But see Reporting by employer, later.)

7. Section 457 plans.

Qualified automatic contribution arrangements.

Under a qualified automatic contribution arrangement, your employer can treat you as having elected to have a part of your compensation contributed to a section 401(k) plan. You’re to receive written notice of your rights and obligations under the qualified automatic contribution arrangement. The notice must explain:

• Your rights to elect not to have elective contributions made, or to have contributions made at a different percentage; and

• How contributions made will be invested in the absence of any investment decision by you.

You must be given a reasonable period of time after receipt of the notice and before the first elective contribution is made to make an election with respect to the contributions.

Overall limit on deferrals.

For 2025, you shouldn’t have deferred more than a total of $23,500 of contributions to the plans listed in (1) through (3), earlier, unless you are age 50 or older. The specific plan limits for the plans listed in (4) through (7), earlier, are discussed later. Amounts deferred under specific plan limits are part of the overall limit on deferrals.

Your employer or plan administrator should apply the proper annual limit when figuring your plan contributions. However, you’re responsible for monitoring the total you defer to ensure that the deferrals aren’t more than the overall limit.

Catch-up contributions.

You may be allowed catch-up contributions (additional elective deferrals) if you’re age 50 or older by the end of your tax year. For 2025, the catch-up limit for section 401(k) and 403(b) plans, the TSP, SARSEP plans, and governmental section 457 plans is $7,500. The catch-up limit is $11,250 if you are age 60, 61, 62, or 63 in 2025. For SIMPLE plans, it’s generally $3,500.

A higher catch-up limit may apply to participants in certain SIMPLE plans. You should contact your plan administrator for more information.

For more information about catch-up contributions to:

• Section 401(k) plans, see Elective Deferrals in chapter 4 of Pub. 560;

• SARSEPs, see Salary Reduction Simplified Employee Pensions in chapter 2 of Pub. 560;

• SIMPLE plans, see SIMPLE Plans in chapter 3 of Pub. 560; and

• Section 457 plans, see Limit for deferrals under section 457 plans, later.

Limit for deferrals under SIMPLE plans.

If you’re a participant in a SIMPLE plan, you generally shouldn’t have deferred more than $16,500 in 2025. Amounts you defer under a SIMPLE plan count toward the overall limit ($23,500 for 2025) and may affect the amount you can defer under other elective deferral plans.

A higher limit may apply to participants in certain SIMPLE plans. You should contact your plan administrator for more information.

Limit for tax-sheltered annuities.

If you’re a participant in a tax-sheltered annuity plan (section 403(b) plan), the limit on elective deferrals for 2025 is generally $23,500. However, if you have at least 15 years of service with a public school system, a hospital, a home health service agency, a health and welfare service agency, a church, or a convention or association of churches (or associated organization), the limit on elective deferrals is increased by the least of the following amounts.

1. $3,000.

2. $15,000, reduced by the sum of:

   1. The additional pre-tax elective deferrals made in earlier years because of this rule, plus

   2. The aggregate amount of designated Roth contributions permitted for prior tax years because of this rule.

3. $5,000 times the number of your years of service for the organization, minus the total elective deferrals made by your employer on your behalf for earlier years.

If you qualify for the 15-year rule, your elective deferrals under this limit can be as high as $26,500 for 2025.

For more information, see Pub. 571.

Limit for deferral under section 501(c)(18) plans.

If you’re a participant in a section 501(c)(18) plan (a trust created before June 25, 1959, funded only by employee contributions), you should have deferred no more than the lesser of $7,000 or 25% of your compensation. Amounts you defer under a section 501(c)(18) plan count toward the overall limit ($23,500 in 2025) and may affect the amount you can defer under other elective deferral plans.

Limit for deferrals under section 457 plans.

If you’re a participant in a section 457 plan (a deferred compensation plan for employees of state or local governments or tax-exempt organizations), you should have deferred no more than the lesser of your includible compensation or $23,500 in 2025. However, if you’re within 3 years of normal retirement age, you may be allowed an increased limit if the plan allows it. See Increased limit, later.

Includible compensation.

Generally, this is your Form W-2 wages plus elective deferrals. In most cases, it includes all the following payments.

1. Wages and salaries.

2. Fees for professional services.

3. The value of any employer-provided qualified transportation fringe benefit (defined under Transportation, earlier) that isn’t included in your income.

4. Other amounts received (cash or noncash) for personal services you performed, including, but not limited to, the following items.

   1. Commissions and tips.

   2. Fringe benefits.

   3. Bonuses.

   4. De minimis financial incentives to make elective deferrals to a qualified cash or deferred arrangement.

5. Employer contributions (elective deferrals) to the following.

   1. The section 457 plan.

   2. Section 401(k) plans that aren’t included in your income.

   3. A SARSEP plan.

   4. A tax-sheltered annuity (section 403(b) plan).

   5. A SIMPLE plan.

   6. A section 125 cafeteria plan.

Instead of using the amounts listed earlier to determine your includible compensation, your employer can use any of the following amounts.

• Your wages as defined for income tax withholding purposes.

• Your wages as reported in box 1 of Form W-2.

• Your wages that are subject to social security withholding (including elective deferrals).

Increased limit.

During any, or all, of the last 3 years ending before you reach normal retirement age under the plan, your plan may provide that your limit is the lesser of:

1. Twice the annual limit ($47,000 for 2025), or

2. The basic annual limit plus the amount of the basic limit not used in prior years (only allowed if not using age 50-or-over catch-up contributions).

Catch-up contributions.

You can generally have additional elective deferrals made to your governmental section 457 plan if:

• You reached age 50 by the end of the year, and

• No other elective deferrals can be made for you to the plan for the year because of limits or restrictions.

If you qualify, your limit can be the lesser of your includible compensation or $23,500, plus $7,500. However, if you’re within 3 years of retirement age and your plan provides the increased limit, discussed earlier, that limit may be higher.

Designated Roth contributions.

Employers with section 401(k) plans, section 403(b) plans, and governmental section 457 plans can create qualified Roth contribution programs so that you may elect to have part or all of your elective deferrals to the plan designated as after-tax Roth contributions. Designated Roth contributions are treated as elective deferrals, except that they’re included in income. Your retirement plan must maintain separate accounts and recordkeeping for the designated Roth contributions. In addition, your retirement plan may allow you to designate certain nonelective contributions or matching contributions as Roth contributions. These Roth contributions are also included in income.

Qualified distributions from a Roth account aren’t included in income. A distribution made before the end of the 5-tax-year period beginning with the first tax year for which a Roth contribution was made to the account isn’t a qualified distribution.

Reporting by employer.

Your employer generally shouldn’t include elective deferrals in your wages in box 1 of Form W-2. Instead, your employer should mark the “Retirement plan” checkbox in box 13 and show the total amount deferred in box 12.

Section 501(c)(18)(D) contributions.

Wages shown in box 1 of Form W-2 shouldn’t have been reduced for contributions you made to a section 501(c)(18)(D) plan. The amount you contributed should be identified with code H in box 12. You may deduct the amount deferred subject to the limits that apply. Include your deduction in the total on Schedule 1 (Form 1040), line 24f.

Designated Roth contributions.

These contributions are elective deferrals but are included in your wages in box 1 of Form W-2. Designated Roth contributions to a section 401(k) plan are reported using code AA in box 12, or, for section 403(b) plans, code BB in box 12. Designated Roth contributions to a governmental section 457 plan are reported using code EE in box 12.

Designated Roth nonelective contributions and designated Roth matching contributions.

These contributions are reported on Form 1099-R for the year in which the contributions are allocated to your account. The total amount of designated Roth nonelective contributions and designated Roth matching contributions that are allocated to your account in the year is reported in box 1 and in box 2a. These contributions are reported using code G in box 7.

Excess deferrals.

If your deferrals exceed the limit, you must notify your plan by the date required by the plan. If the plan permits, the excess amount will be distributed to you. If you participate in more than one plan, you can have the excess paid out of any of the plans that permit these distributions. You must notify each plan by the date required by that plan of the amount to be paid from that particular plan. The plan must then pay you the amount of the excess, along with any income earned on that amount, by April 15 of the following year.

You must include the excess deferral in your income for the year of the deferral. File Form 1040 or 1040-SR to add the excess deferral amount to earned income on line 1h.

Excess not distributed.

If you don’t take out the excess amount, you can’t include it in the cost of the contract even though you included it in your income. Therefore, you’re taxed twice on the excess deferral left in the plan—once when you contribute it, and again when you receive it as a distribution (unless the excess deferral was a designated Roth contribution).

Excess distributed to you.

If you take out the excess after the year of the deferral and you receive the corrective distribution by April 15 of the following year, don’t include it in income again in the year you receive it. If you receive it later, you must include it in income in both the year of the deferral and the year you receive it (unless the excess deferral was a designated Roth contribution). Any income on the excess deferral taken out is taxable in the tax year in which you take it out. If you take out part of the excess deferral and the income on it, allocate the distribution proportionately between the excess deferral and the income.

You should receive a Form 1099-R for the year in which the excess deferral is distributed to you. Use the following rules to report a corrective distribution shown on Form 1099-R for 2025.

• If the distribution was for a 2025 excess deferral, your Form 1099-R should have code 8 in box 7. Add the excess deferral amount to your wages on your 2025 tax return.

• If the distribution was for a 2025 excess deferral to a designated Roth account, your Form 1099-R should have codes B and 8 in box 7. Don’t add this amount to your wages on your 2025 return.

• If the distribution was for a 2024 excess deferral, your Form 1099-R should have code P in box 7. If you didn’t add the excess deferral amount to your wages on your 2024 tax return, you must file an amended return on Form 1040-X. If you didn’t receive the distribution by April 15, 2025, you must also add it to your wages on your 2025 tax return.

• If the distribution was for the income earned on an excess deferral, your Form 1099-R should have code 8 in box 7. Add the income amount to your wages on your 2025 income tax return, regardless of when the excess deferral was made.

Report a loss on a corrective distribution of an excess deferral in the year the excess amount (reduced by the loss) is distributed to you. Include the loss as a negative amount on Schedule 1 (Form 1040), line 8z, and identify it as “Loss on Excess Deferral Distribution.”

Tip:

Even though a corrective distribution of excess deferrals is reported on Form 1099-R, it isn’t otherwise treated as a distribution from the plan. It can’t be rolled over into another plan, and it isn’t subject to the additional tax on early distributions.

Using the guidance

Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.

Sources and further reading

• Publication 525 (2025), Taxable and Nontaxable Income: Employee Compensation — Retirement Plan Contributions — Elective Deferrals — Internal Revenue Service; 2025 edition.

The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.