IRS Raises Several Annual Retirement Plan Limits for 2018

The Internal Revenue Service (IRS) raised several annual threshold and benefit levels for 2018 when it announced them on October 19. Employers and retirement plan administrators can apply the new rates as they prepare their plans for next year and conduct nondiscrimination testing. Notice 2017-64 outlined 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 that meet the statutory thresholds for annual adjustment by the IRS. Most of the limits were not changed for 2017.

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 (TSP) for 2018 is increased to $18,500 from $18,000. It last rose, by $500, for 2015.

For 2018, 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 TSP stays at $6,000.

The 415 limitation for defined contribution plans under Section 415(c)(1)(A) is also raised for next year, to $55,000 from $54,000.

The limitation on an annual benefit under a defined benefit plan under Section 415(b)(1)(A) is increased to $220,000 from $215,000, effective January 1, 2018. 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 2017, by 1.0196.

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 $275,000 from $270,000 in 2017.

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.

For calendar year 2018, the Social Security taxable wage base increases to $128,700 from $127,200.

Nondiscrimination Testing

These are the 2018 rates relevant to nondiscrimination testing:

  • The threshold for defining a “control employee” for fringe benefit valuation purposes is lifted to $110,000 from $105,000. The compensation amount under Section 1.61 21(f)(5)(iii) goes up to $220,000 from $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 remains $175,000.

Retirement Plans

  • The limitation on deferrals under Section 457(e)(15) relevant to deferred compensation plans of state and local governments and tax-exempt organizations is increased to $18,500 from $18,000.
  • 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 $275,000 from $270,000. 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 $405,000 from $400,000 in 2017.
Jane Meacham is the editor of BLR’s retirement plan compliance publications. She has nearly 30 years’ experience as a writer/editor of financial services news.

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Author: Jane Meacham, Contributing Editor