As many employers know,
employee benefit plans are subject to yearly adjusted dollar limitations for
benefits, contributions, compensation, and other items. These yearly benefit
limits are generally determined by inflation data from the third fiscal quarter
of each year. Here, we discuss the new limits set by the IRS.
The IRS recently
unveiled the annual cost-of-living adjustments (COLAs) applicable to employee
benefit plans for 2008. In general, the IRS announced modest increases for
maximum contribution levels in benefit plans, as well as other changes such as:
• Annual compensation
thresholds. In 2008, the annual compensation earned by a “control employee”
remains at $90,000. However, to be considered a “highly compensated employee,”
an individual must earn at least $105,000 a year, up from the 2007 level of
$100,000. The annual salary threshold for “key employees” increases to $150,000
in 2008, up from $145,000 in 2007.
• 401(k) plans and
457 defined contribution plans. For 401(k) and 457 defined contribution plans,
the limit on an employee’s elective deferral or pre-tax contribution remains at
$15,500. For employees who are age 50 or older, the limit on “catch up” contributions
stays at $5,000. However, the cap for pre-tax, after-tax, and employee
contributions to these plans rises to $46,000 (up from the 2007 level of
$45,000). The compensation limit used to determine the amount an employee can
deduct increases to $230,000 per individual employee, up from $225,000.
• SEP and SIMPLE
plans. For an employee with a simplified employee pension (SEP) plan, the
maximum compensation that can be used when calculating the percentage of
compensation contribution is up to $230,000 (from $225,000), while the minimum compensation
threshold for participation remains at the $500 mark. In addition, for any
employee with a savings incentive match plan for employees (SIMPLE plan), the
maximum employer contribution stays at $10,500, and the $2,500 catch-up limit
for contributions by employees 50 or older remains the same.
• Annual defined
benefit limit. The limit on the yearly benefit for defined benefit plans is
$185,000, up from $180,000.
• Compensation cap
under governmental plans. The compensation cap for eligible participants in
certain government plans increases to $345,000, from $335,000.
• ESOP and stock
bonus plans. The employee stock ownership plan (ESOP) and stock bonus plan extended
distribution period thresholds are at a minimum level of $185,000 (up from
$180,000) and a maximum of $935,000 (up from $915,000). The IRS also stated
that several pension-related amounts are to be adjusted using the 2008 COLAs:
• To determine the
retirement savings contribution credit for joint tax return filers, the
adjusted gross income limit is $32,000 (up from $31,000).
• To determine the retirement
savings contribution credit for head of household filers, the adjusted gross
income limit is $24,000 (up from $23,250).
• To determine the
retirement savings contribution credit for all other taxpayers, the adjusted
gross income limit is $16,000 (up from $15,500).
• The amount for
determining how much of an IRA contribution can be deducted for taxpayers who
are active participants filing a joint return, or as a qualifying widow(er),
increases from $83,000 to $85,000. The amount for all other taxpayers (except
married taxpayers filing separately) rises from $52,000 to $53,000.
• To determine the
maximum Roth IRA contribution for joint filers or for individuals filing as a
qualifying widow(er), the adjusted gross income limit is $159,000 (up from
$156,000). For all other taxpayers (except married taxpayers filing
separately), the limit is $101,000 (up from $99,000).
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Impact on Employers
When COLAs are
significant, employers may face the dilemma of whether, after providing a benefit,
they should be obligated to increase the benefit if economic forces make it
less valuable then it used to be. Similarly, employers may confront the
practical problem of what can be done to improve the benefit plan’s financial structure,
up to and including employer contributions. Because the increase was modest
this year, these issues are not likely to be pressing.
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Although the increases
and changes are relatively small, employers should still be aware of these new COLAs
and their applicability to employee benefit plans in 2008. Every new year
brings changes to payroll numbers in some areas while figures in other areas remain
the same, and this year is no exception. This list of payroll figures,
contribution and benefit limitations, COLAs, and other important numbers set by
the IRS should assist those that are handling payroll duties this year.