On October 20, 2011, the Internal Revenue Service announced cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for Tax Year 2012. In general, many of the pension plan limitations will change for 2012 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. However, other limitations will remain unchanged.
Section 415 of the Internal Revenue Code provides for dollar limitations on benefits and contributions under qualified retirement plans. Section 415(d) requires that the Commissioner annually adjust these limits for cost of living increases. Other limitations applicable to deferred compensation plans are also affected by these adjustments under Section 415. Under Section 415(d), the adjustments are to be made pursuant to adjustment procedures which are similar to those used to adjust benefit amounts under Section 215(i)(2)(A) of the Social Security Act.
The limitations that are adjusted by reference to Section 415(d) generally will change for 2012 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment.
Limitation
Type |
IRC
Section |
2012 |
2011 |
2010 |
Defined Benefit Plan
Maximum Benefit Limit |
415(b)(1)(A) |
$200,000 |
$195,000 |
$195,000 |
Defined Contribution Plan
Maximum Contribution Limit |
415(c)(1)(A) |
$50,000 |
$49,000 |
$49,000 |
Annual Compensation Limit
All Plans |
401(a)(17),
404(1), 408(k)(3)(C) and 408(k)(6) (D)(iii) |
$250,000 |
$245,000 |
$245,000 |
Elective Deferrals Limit
401(k) and 403(B) Plans |
402(g)(1) |
$17,000 |
$16,500 |
$16,500 |
Elective Deferrals Limit
457(B) and 457(C) Plans |
457(b)(2)
and 457(c)(1) |
$17,000 |
$16,500 |
$16,500 |
Catch-Up Contribution
Limit
401(k), 403(B) and 457 Plans |
414(v)(2)(B)(i) |
$5,500 |
$5,500 |
$5,500 |
Highly
Compensated Employee Compensation Breakpoint |
414(q)(1)(B) |
$115,000 |
$110,000 |
$110,000 |
Key
Employees Officer Compensation Breakpoint |
416(i)(1)(A)(i) |
$165,000 |
$160,000 |
$160,000 |
Key
Employee 1% Owner Compensation Breakpoint |
416(i)(1)(A)(i) |
$165,000 |
$160,000 |
$160,000 |
SIMPLE
Retirement Accounts
Deferral Limit |
408(p)(2)(B)
and 401(k)(11)(B) |
$11,500 |
$11,500 |
$11,500 |
SIMPLE
Catch-Up Contribution Limit |
414(v)(2)(B)(ii) |
$2,500 |
$2,500 |
$2,500 |
SEP
Employee Covered Compensation |
408(k)(2)(C) |
$550 |
$550 |
$550 |
Social Security Wage Base
(No limit for Medicare tax) |
N/A |
$110,100 |
$106,800 |
$106,800 |
Social
Security Benefit COLA
Cost-of-Living Adjustments |
N/A |
3.5% |
0.0% |
0.0% |
FICA
Tax Employer and Employees |
N/A |
7.65% |
7.65% |
7.65% |
Social
Security/Medicare Tax
Employees and Employers |
N/A |
6.2%/1.45%
|
4.2%/1.45%
6.2%/1.45% |
6.2%/1.45% |
FICA
Tax Self-Employed Workers |
N/A |
15.30% |
15.30% |
15.30% |
Social
Security/Medicare Tax
Self-Employed Workers |
N/A |
12.4%/2.90% |
12.4%/2.90% |
12.4%/2.90% |
Details of the 2012 Cost-of-Living Limits
Effective January 1, 2012, the limitation on
the annual benefit under a defined benefit plan
under Section 415(b)(1)(A) is increased from $195,000 to $200,000. Under section 1.415(d)-1(a)(2)(ii) of the Income Tax Regulations, the adjustment to the limitation under a defined benefit plan under section 415(b)(1)(B) is determined using a special rule. This special rule takes into account following recent history changes in the cost-of-living indexes: (1) the cost-of-living index for the quarter ended September 30, 2009, was less than the cost-of-living index for the quarter ended September 30, 2008; (2) the cost-of-living index for the quarter ended September 30, 2010, was greater than the cost-of-living index for the quarter ended September 30, 2009, but less than the cost-of-living index for the quarter ended September 30, 2008; and (3) the cost-of-living index for the quarter ended September 30, 2011, was greater than the cost-of-living indexes for all prior periods.
For a participant who separated from service before January 1, 2010, the limitation under a defined benefit plan under Section 415(b)(1)(B) for 2012 is computed by multiplying the participant's 2011 compensation limitation by 1.0327 in order to reflect changes in the cost-of-living index from the quarter ended September 30, 2008, to the quarter ended September 30, 2011. For a participant who separated from service during 2010 or 2011, the limitation under a defined benefit plan under Section 415(b)(1)(B) for 2012 is computed by multiplying the participant's 2011 compensation limitation by 1.0376 in order to reflect changes in the cost-of-living index from the quarter ended September 30, 2010, to the quarter ended September 30, 2011.
The limitation for defined contribution plans
under Section 415(c)(1)(A) is increased in 2012 from $49,000 to $50,000.
The Code provides that various other dollar amounts are to be adjusted at the same time and in the same manner as the dollar limitation of Section 415(b)(1)(A). After taking into account the applicable rounding rules, the amounts for 2012 are as follows:
The limitation under Section 402(g)(1) on
the exclusion for elective deferrals described
in Section 402(g)(3) is increased $16,500 to $17,000.
The annual compensation limit under Sections
401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii)
is increased from $245,000 to $250,000.
The dollar limitation under Section 416(i)(1)(A)(i)
concerning the definition of key employee in
a top-heavy plan is increased from $160,000 to $165,000.
The dollar amount under Section 409(o)(1)(C)(ii)
for determining the maximum account balance
in an employee stock ownership plan subject
to a 5-year distribution period is increased from $985,000 to $1,015,000, while the dollar
amount used to determine the lengthening of
the 5-year distribution period is increased from $195,000 to $200,000.
The limitation used in the definition of
highly compensated employee under Section 414(q)(1)(B) is increased from $110,000 to $115,000.
The dollar limitation under Section 414(v)(2)(B)(i)
for catch-up contributions to an applicable
employer plan other than a plan described in
Section 401(k)(11) or Section 408(p) for individuals
aged 50 or over remains unchanged at $5,500.
The dollar limitation under Section 414(v)(2)(B)(i) for catch-up contributions to an applicable employer plan other than a plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over remains unchanged at $5,500. The dollar limitation under Section 414(v)(2)(B)(ii) for catch-up contributions to an applicable employer plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over remains unchanged at $2,500.
The annual compensation limitation under Section 401(a)(17) for eligible participants in certain governmental plans that, under the plan as in effect on July 1, 1993, allowed cost of living adjustments to the compensation limitation under the plan under Section 401(a)(17) to be taken into account, is increased from $360,000 to $375,000.
The compensation amount under Section 408(k)(2)(C)
regarding simplified employee pensions (SEPs) remains unchanged at $550.
The limitation under Section 408(p)(2)(E)
regarding SIMPLE retirement accounts remains unchanged at $11,500.
The limitation on deferrals under Section
457(e)(15) concerning deferred compensation
plans of state and local governments and tax-exempt
organizations is increased from $16,500 to $17,000.
The compensation amounts under Section 1.61-21(f)(5)(i)
of the Income Tax Regulations concerning the
definition of “control employee” for
fringe benefit valuation purposes is increased from $95,000 to $100,000.
The compensation amount under Section 1.61-21(f)(5)(iii) is increased from $195,000 to $205,000.
Administrators of defined benefit or defined
contribution plans that have received favorable
determination letters should not request new
determination letters solely because of yearly
amendments to adjust maximum limitations in the
plans.
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