The Internal Revenue Service (“IRS”) recently announced cost of living adjustments affecting retirement plans. These new limitations are effective for tax year 2012. Many, but not all, applicable dollar limitations will increase. For this purpose, the IRS uses an adjustment process that is similar to the process used to adjust Social Security benefits (which also will increase effective in 2012).
Some of the more important increases relevant to retirement plans are as follows:
- the elective deferral limit applicable to 401(k), 403(b) and certain 457 plans will be increased from $16,500 to $17,000;
- the dollar limitation on the maximum annual benefit under a defined benefit pension plan will be increased from $195,000 to $200,000;
- the annual dollar limit for includible compensation generally applicable to tax-qualified retirement plans will be increased from $245,000 to $250,000;
- the dollar limitation related to the definition of key employee will be increased from $160,000 to $165,000;
- the dollar limitation used in the definition of a highly compensated employee will be increased from $110,000 to $115,000; and
- the dollar limitation for the maximum annual addition under a defined contribution plan will be increased from $49,000 to $50,000.
However, some limitations will not change in 2012, including the following:
- the general catch-up contribution maximum dollar limit (applicable to participant age 50 and higher) will remain at $5,500;
- the compensation amount for simplified employee pensions will remain at $550; and
- the maximum dollar limitation for SIMPLE retirement accounts remains unchanged at $11,500.
Some adjustments will be made related to IRAs as well. The deduction for taxpayers making contributions to a IRA is phased out for who are covered by a retirement plan and who have modified adjusted gross incomes over specified limits. Beginning in 2012, that phase out range or singles and heads of household occurs $58,000 and $68,000 (previously from $56,000 and $66,000). For married couples filing jointly (to the extent the spouse who makes the IRA contribution is covered by a retirement plan), the phase-out range is $92,000 to $112,000 (previously $90,000 to $110,000). With respect to a person who makes a contribution to an IRA, is not covered by a retirement plan but is married to a person who is covered, the phase out range applicable to the couple’s income will be $173,000 and $183,000 (previously $169,000 and $179,000). Adjustments also are being made in 2012 to phase-out ranges for certain persons making contributions to Roth IRAs. For married couples filing jointly the phase out range will b $173,000 to $183,000 (previously $169,000 to $179,000). For singles and heads of household, the phase out range will be $110,000 to $125,000 (previously $107,000 to $122,000).
The dollar amount for ESOPs applicable for determining the maximum account balance that is subject to a 5-year distribution period will be increased from $985,000 to $1,015,000, and the dollar amount used by ESOPs to determine the lengthening of the 5 year distribution period will be increased from $195,000 to $200,000.
As a practical matter, most sponsors of tax-qualified retirement plans do not hard wire these dollar limitations into their plan documents. Accordingly, it seems unlikely that these announced increases will require the adoption of plan amendments. However, plan sponsors are well advised to review their internal payroll and plan administration systems to ensure that all necessary adjustments to those system are made in a thorough and timely fashion. Remember that 2012 is right around the corner!