Benefits and Compensation

IRS Again Leaves Most Annual Retirement Plan Limits Unchanged

The Internal Revenue Service (IRS) again left most annual threshold and benefit levels unchanged when it announced them for 2017 on October 27, 2016. Employers and retirement plan administrators can apply the new rates as they prepare their plans for next year and conduct nondiscrimination testing. Notice 2016-62 laid out the latest changes to cost-of-living adjustments for employee benefit plans.

Retirement

The limits affect maximum contribution levels. Decisions about raising thresholds important to retirement plan administration for each tax year are based on changes in the Consumer Price Index; most did not meet the statutory thresholds for adjustment by the IRS for 2017.

However, the limitation on an annual benefit under a defined benefit plan under Section 415(b)(1)(A) was raised to $215,000 from $210,000, effective January 1, 2017. The limitation for a participant separated from employment before that date with a defined benefit plan is computed by multiplying the participant’s compensation limitation, as adjusted for 2016, by 1.0112.

The 415 limitation for defined contribution plans under Section 415(c)(1)(A) is increased for next year to $54,000 from $53,000.

In addition, the annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C) and 408(k)(6)(D)(ii) is rising to $270,000 from $265,000 in 2016.

Adhering to these thresholds in administering benefit plans is important in order for a plan to stay in compliance and not threaten its qualified status, as well as in making sure that additional taxes are not imposed on employees.

Nondiscrimination Testing

These are the 2017 rates relevant to nondiscrimination testing:

  • For 2017, the threshold for defining a “control employee” for fringe benefit valuation purposes remains unchanged at $105,000. The compensation amount under Section 1.61 21(f)(5)(iii) stays at $215,000.
  • The bar for “highly compensated employee” under Section 414(q)(1)(B) is unchanged at $120,000.
  • The dollar limit that defines a “key employee” in a top-heavy plan increases to $175,000 from $170,000.

Retirement Plans

  • The elective deferral, or contribution, limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan for 2017 remains at $18,000. It last rose, by $500, for 2015.
  • The limitation on deferrals under Section 457(e)(15) relevant to deferred compensation plans of state and local governments and tax-exempt organizations also remains unchanged at $18,000.
  • For 2017, the catch-up contribution limit for employees age 50 and older who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan stays at $6,000 for the new year.
  • The 2017 annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) is lifted to $270,000 from $265,000. The annual compensation limit under Section 401(a)(17) for participants in some governmental plans that allow cost-of-living adjustments also will rise, to $400,000 from $395,000 in 2016.