Dollar Limits for 2017 Announced:

The new dollar limits for year 2017 have been announced by IRS.  Most are increased from 2016.

Year   

2017

2016

2015

Defined Benefit Limit

$215,000   

$210,000   

$210,000

Defined Contribution Limit

$54,000 

$53,000 

$53,000

Compensation Limit   

$270,000  

$265,000  

$265,000

401(k) Limit

$18,000

$18,000

$18,000

401(k) Catch-Up Limit

$6,000

$6,000

$6,000

SIMPLE Contribution Limit

$12,500

$12,500

$12,500

Highly Compensated Employee Definition

$120,000

$120,000

$120,000

Pension Protection Act of 2006

The President signed into law the Pension Protection Act in August, 2006.  The pension bill contained many provisions affecting both defined benefit and  defined contribution plans.  All changes are effective in 2008 unless otherwise noted.

DEFINED BENEFIT PLAN CHANGES

Defined Benefit Plan Funding is strengthened.  Plans will have both a minimum required contribution and a maximum deductible contribution which are related to benefits that have accrued to date.

Maximum Contribution Allowance is expanded.  A plan may contribute up to 150% of the unfunded current liability.  Effective in 2006.

Restrictions on Benefit Increases - DB plans that are less than 80% funded would not be able to increase benefits.

Restrictions on Lump Sum Payments - DB plans that are less than 60% funded would not be able to pay out lump sums.  Those between 60% and 80% funded can only pay out limited lump sums.

Cessation of Future Accruals - DB plans that are less than 60% funded would be required to freeze benefit accruals. 

Lump Sum Interest Rate (for determining actuarial equivalence of the section 415 Limit) is the greatest of 5.5%, the interest rate specified in the plan, or a rate that produces a benefit no more than 105% of the benefit computed using the 417(e)3 rate.  This change is effective in 2006.

Limit on Plan Amendments - In computing the maximum deductible contribution for plans with fewer than 100 participants, plan amendments increasing benefits in the past two years cannot be taken into account.  


DEFINED CONTRIBUTION PLAN CHANGES

Automatic Enrollment - 401(k) plans using this feature would not have to make ADP/ACP refunds until six months after the end of the plan year.  Also, such a plan may be deemed a Safe Harbor 401(k) plan, if other conditions are met.

Accelerated Vesting - The six-year graded vesting schedule for top-heavy plans is now the minimum graded vesting schedule for all DC plans.  Effective in 2007.


MISCELLANEOUS PROVISIONS

EGGTRA Provisions, which were scheduled to expire in 2010, have been made permanent. 

Combined Plan Limits - DC plan contributions under 6% of pay are not counted against the IRC 404(a)(7) limit (25% of payroll).  Effective in 2006. Also, plans covered under the PBGC are no longer subject to the combined plan limit of 25% of pay. Effective in 2008.

Participant Benefit Statements - These are now required (a) quarterly for participant-directed DC plans, (b) annually for other DC plans, and (c) triennially for DB plans.  Electronic transmittal will be allowed.  Effective in 2007.

Form 5500-EZ will not be required for one-participant plans with less than $250,000 in plan assets.  Effective in 2007.


Roth 401(k) Plans:

Roth 401(k) plans are allowed as part of a 401(k) plan effective in 2006.  This means that, if the plan sponsor amends the plan to permit Roth deferrals, then participants may make deferrals on an after-tax basis.  The Roth deferrals are made after-tax, and Roth distributions are TAX FREE (assuming the first Roth deferral was made at least 5 years ago).  A participant may allocate his deferral between Roth 401(k) and traditional 401(k) deferrals.  But the overall 401(k) deferral limit is still $17,500 for 2013 (or $23,000 if age 50).

This can be a great additional saving tool for employees.  But to analyze if it is right for you, you must make a decision about tax rates.  If the marginal tax rate at the time of distribution is greater than or equal to the rate at the time of deferral, then Roth deferrals make more sense than traditional 401(k) deferrals.  It may even be financially advisable if the distribution tax rate is LOWER than the deferral rate.  But, if the distribution rate is MUCH LOWER than the deferral rate, the traditional 401(k) makes more sense.  It all depends on your investment time horizon and on the tax rates.


Qualified retirement plans have many limits that need to be addressed by a qualified plan specialist.  If you have any more questions about any of these issues, please contact us at ALI Actuarial & Retirement Plan Services.