The Internal Revenue Service recently announced that many of the limits that affect the amount that may be contributed to qualified retirement plans are being increased for 2012. Some of the changes may impact all employees while others may only affect those who are highly compensated. Here’s a summary of the most important changes:
The maximum amount of elective deferrals that may be contributed to a 401(a) or 403(b) plan is increased from $16,500 to $17,000. The catch-up limit for employees age 50 and older remains the same. Contributions to deferred compensation plans under Code section 457(b) are also increased to $17,000.
The total amount that may be contributed to a defined contribution plan (e.g., 401(k), 403(b) or profit sharing plan) is increased $1,000 to $50,000. In addition the maximum annual compensation that may be counted for plan contribution purposes will be $250,000, up from $245,000 this year. These increases will allow more money to be contributed on behalf of highly compensated employees to these plans, and will be of particular benefit to plans such as new comparability plans.
The annual benefit that may be provided in a defined benefit plan will increase from $195,000 to $200,000. This may allow additional money to be contributed for those accruing the maximum allowable benefit in a traditional or cash balance pension plan.
It is critical to determine who is a highly compensated employee for non-discrimination testing. Currently, anyone who earns more than $110,000 in the year immediately preceding the testing year is one of categories of employees deemed highly compensated (Those who own 5% or more of the employer in the current or preceding year are also considered highly compensated.). That threshold has been increased to $115,000 in 2012.
Plans of smaller employers are affected by the “top heavy” rules which may require additional contributions where 60% or more of the benefits accrue to “key employees.” Key employees include officers whose compensation exceeds a specified amount. That amount was $160,000 and is now increased to $165,000.
Finally, the social security taxable wage base has been increased from $106,800 to $110,100. This limit determines the wages subject to social security tax. But it is also used in plans that provide “permitted disparity.” Defined contribution plans that provide for permitted disparity allocate additional contributions to plan participants who earn more than the taxable wage base or some percentage of the wage base. Defined benefit plans may also provide for permitted disparity, using the wage base as a factor to accrue additional pension benefits for those participants whose compensation exceeds that amount.