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In Practice November 15, 2006
2007 Compensation and Benefits Limits Published
Last week, the Internal Revenue Service (IRS) unveiled the maximum benefit and contribution limits on qualified retirement plans for 2007, and, for most of the limitations, the increase in the cost-of-living index met the legal thresholds to trigger the changes.
Reported by Alison Cooke
The Pension Protection Act eliminated the sunset provisions on limit increases introduced with the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), but many of the limits will continue to increase based on cost-of-living adjustments. Under Section 402(g), retirement plan participants will be allowed to defer up to $15,500 to their 401(k) plan in 2007, an increase of $500 over the 2006 limit, but just half the $1,000/year step-up that followed EGTRRA’s passage. The limit on deferrals under 457(e)(15) deferred compensation plans of state and local governments and tax-exempt organizations is also increased from $15,000 to $15,500. The Section 415 annual additions limit, the maximum total contribution to defined contribution plans, including employer contributions, will rise to $45,000 per participant from $44,000.
Also a change from previous years, the allowed “catch-up” contribution, available to those who will be age 50 or older by the end of the year, is not tied to a cost-of-living adjustment provision, and will remain unchanged at $5,000 in 2007.
For purposes of non-discrimination testing, the highly compensated threshold remains $100,000 a year, while the annual compensation limit under Sections 401(a) (17), 404(l), 408(k) (3) (C), and 408(k) (6) (D) (ii) is going up from $220,000 to $225,000, and the dollar limit under Section 416(I) (1) (A) (I) concerning the definition of key employee in a top-heavy plan is increased from $140,000 to $145,000.
The limitation under Section 408(p)(2)(E) regarding SIMPLE retirement accounts is increased from $10,000 to $10,500.
The limit on the annual benefit under a defined benefit plan under Section 415(b) (1) (A) is being bumped up from $175,000 to $180,000, and the amount of employee compensation that can be considered in calculating pension benefits and contributions to defined contribution plans will rise to $225,000 from $220,000.
This annual change in deferral limits is a great way to lead off an education campaign at your clients’ workplaces. Not only does it spur discussion with your CFO or CEO clients (the amount of income subjected to FICA withholding also increased, this year to $97,500 from $94,200), and while they might already be maxing out the current limits, this is a chance to plan ahead. It can also be a good point of contact with the general employee base, especially those over 50 who are eligible for the catch-up provisions, and the Saver’s Credit and Roth 401(k), which were given a new lease on life with the Pension Protection Act.
A table with these changes detailed is online at http://www.plansponsor.com/solution_type1/?RECORD_ID=11611