The fact that for 2025 through 2028, tipped workers may deduct up to $25,000 from their federal income taxes has been widely publicized. But what has not received a lot of attention is the negative effect this may have on their participation in 401(k) plans.
The problem arises from the fact that tips reported to the employer are reported on the the Form W-2 and subject to income tax withholding. The deduction for tips does not reduce wages for either of those purposes. And a 401(k) plan typically defines compensation from which 401(k) deferrals can be made as either Form W-2 income or compensation subject to withholding. So a tipped individual would be allowed to make 401(k) deferrals out of tips.
Normally, making 401(k) deferrals on a pre-tax basis provides a tax advantage to an employee by deferring taxes on the deferrals until they are distributed from the plan. However, in the case of a tipped employee, it may actually create a tax disadvantage, because it converts otherwise tax-free income into taxable income.
Continue reading →
The IRS has now issued Notice 2025-67, setting forth section 415 and several other IRS limits for 2026. Maximum employee deferrals under a 401(k) plan went up from $23,500 to $24,500. Catch-ups for those over 50 went up from $7,500 to $8,000, while catch-ups for those ages 60-63 stayed the same at $11,250. However (new for this year), catch-ups for those with previous year’s Social Security wages of at least $150,000 must be made as Roth contributions.
The Social Security Administration had already issued a news release indicating that the Social Security wage base will rise from $176,100 to $184,500 for 2026.
A chart showing details, and limits from 1996 to 2026, can be found at this link.
In 2024, a provision in the SECURE 2.0 legislation permits an employer that is not sponsoring a retirement plan to offer a starter 401(k) or safe harbor 403(b) plan to its employees that is exempt from certain nondiscrimination requirements.
Use this checklist to determine which retirement plans can use pre-approved plan documents to satisfy the requirements for preferential tax treatment under the Internal Revenue Code (I.R.C.). The IRS maintains preapproved plan programs pursuant to Rev. Proc. 2023-37, (1) for retirement plans described in I.R.C. § 401(a) (qualified plans), and (2) for annuity contracts or custodial accounts described in I.R.C. § 403(b) (403(b) plans). The programs available for pre-approved plans are different depending on the type of plan and the type of employer.
The IRS maintains pre-approved plan programs (1) for retirement plans described in I.R.C. § 401(a) (qualified plans), and (2) for annuity contracts or custodial accounts described in I.R.C. § 403(b) (403(b) plans). A new chart shows what types of plans are and are not eligible to use the pre-approved plan program.
Read more.
Tax-exempt organizations face special legal challenges in developing compensation packages for their executives. A new article, Executive Compensation Arrangements for Tax-Exempt Organizations, published in the Lexis Practice Advisor provides practical guidance on developing benefits for executives of nonprofits.
This article is divided into the following main topics:
- Executive compensation considerations for tax-exempt entities
- Excise Tax on Excess Executive Compensation
- Deferred compensation rules
- Severance pay
- Vacation and sick leave plans
- Performance bonuses and other nonfixed payments
- Fringe benefits
Read more.
Reload document 
Open in new tab