On October 21, 2015, in Information Release 2015-118, the IRS announced cost-of-living adjustments to various dollar limitations under the Internal Revenue Code (the "Code") for pension plans and other related items for the year 2016. Those limitations and thresholds generally remain unchanged from this year's amounts because the measuring cost-of-living indices did not increase sufficiently to warrant adjustments. So, for example:
- The limit on elective deferrals under 401(k) plans, 403(b) plans and most 457 plans will remain at $18,000.
- The limits on age-50 catch-up contributions will remain at $6,000 (for 401(k), 403(b) and 457 plans), $3,000 (for SIMPLE plans), or $1000 (for IRAs), as the case may be.
- The annual compensation limit will remain at $265,000.
- The overall limitation on annual additions to a participant's account in a defined contribution plan under section 415(c) of the Code will remain at $53,000.
- The maximum annual benefit in a defined benefit plan under section 415(b) of the Code will remain at $210,000.
- The compensation thresholds that apply in determining who is a highly compensated employee or a key employee will remain at $120,000 and $170,000, respectively.
- The dollar amounts used in applying the five-year distribution period requirements to an ESOP under section 409(o) of the Code will remain at $1,070,000 and $210,000.
- The deduction for contributions to a traditional IRA is phased out at (i) between $61,000 and $71,000 for single taxpayers and heads of household who are covered by a retirement plan, (ii) between $98,000 and $118,000 for married couples filing jointly, where the spouse making the IRA contribution is covered by a retirement plan, and (iii) between $0 and $10,000 for married individuals filing separate returns who are covered by a retirement plan; these are all unchanged from current ranges.
- The phase-out range for a married individual filing a separate return who makes a Roth IRA contribution also remains at $0 to $10,000.
Although minor and, in some cases, less well-known, there were a few changes made. For example:
- The phase-out for IRA contributions for a married contributor filing a joint return, who is not covered by a retirement plan but whose spouse is covered, occurs between $184,000 and $194,000 of AGI, up from $183,000 - $193,000.
- The phase-out range for making contributions to a Roth IRA is also $184,000 to $194,000 for married couples filing jointly, up from $183,000 to $193,000, and $117,000 to $132,000 for singles and heads of household, up from $116,000 to $131,000.
- The AGI limitation for the "retirement savings contribution credit" for low- and moderate-income taxpayers is $61,500 for married couples filing jointly (up from $61,000); $46,125 for heads of household (up from $45,750); and $30,750 for single taxpayers and married individuals filing separately (up from $30,500). The lesser thresholds for the higher percentage credits also increased proportionately for each filing status.
- The threshold for determining when a multiemployer plan is a "systematically important plan" under section 432(e) of the Code was increased to $1,012,000,000 from the current $1,000,000,000.
Apart from the retirement plan changes, the IRS also announced 2016 numbers applicable to certain fringe benefits, such as health FSAs or MSAs, in Revenue Procedure 2015-53. Some of those are:
- The annual dollar limit on employee salary reductions for contributions to health FSAs will remain at $2,550.
- The maximum adoption credit, or the maximum exclusion under an employer-provided adoption assistance program, will increase to $13,460 (from $13,400), and begins to be phased out once modified adjusted gross income goes from $201,920 to $241, 920 (up from $201,010 - $241,010).
- The monthly limits applicable to qualified transportation fringe benefits:
- will remain at $130 for transit passes and commuter highway vehicle transport; and
- will increase to $255 for qualified parking (from $250).
- For purposes of Archer medical savings accounts (Archer MSAs):
- a self-only high-deductible health plan must have an annual deductible of between $2,250 and $3,350 (both up $50 from this year), and out-of-pocket expenses for covered benefits must not exceed $4,450 (unchanged)
- a family high-deductible health plan must have an annual deductible of between $4,450 (unchanged) and $6,700 (up $50 from this year), and out-of-pocket expenses for covered benefits must not exceed $8,150 (unchanged).
- The amounts of long-term care insurance premium that may be deducted as medical expenses are increased by approximately 2½ percent, or from $10 to $120, depending upon age.
- The small business health care tax credit is phased out based, in part, on an employer's average annual wages in excess of an indexed threshold; that threshold increases to $25,900 for 2016 (from $25,800). The $25,900 amount is also used to determine who is an eligible small employer for purposes of the credit.
Excess Advance Premium Tax Credits
The ACA created a refundable tax credit for eligible individuals and families who utilize the ACA exchanges to obtain health insurance. If a taxpayer meets certain conditions, some or all of the estimated amount of this premium tax credit can be paid to an insurer up front towards their premium payment. However, in cases where a taxpayer's advance credit payments turn out to be more than the actual premium tax credit to which he or she is entitled, the taxpayer owes that excess credit as additional tax, subject to limits. Following are the limits for 2016 (unchanged unless indicated):
- Household income below 200 percent of the federal poverty level (FPL):
- $300 for unmarried individuals other than surviving spouses and heads of household); and
- $600 for all others.
- Household income at least 200 percent, but below 300 percent, of the FPL:
- $750 for unmarried individuals other than surviving spouses and heads of household); and
- $1,500 for all others.
- Household income is at least 300 percent, but below 400 percent, of the FPL:
- $1,275 for unmarried individuals other than surviving spouses and heads of household) (up from $1250 this year); and
- $2,550 for all others (up from $2500 this year).
Social Security Changes
Under the Social Security Act, cost-of-living changes are automatically applied based on the change in a designated consumer price index (CPI-W) from the third quarter of one year to the third quarter of the next. On October 15, 2015, the Social Security Administration (SSA) announced that there had been no change in the CPI-W in the past year, and therefore there would be no COLI in social security benefits for 2016. The Social Security taxable wage base is subject to the same adjustment, and so also remains unchanged at $118,500. (Health and Human Services has not yet announced changes, if any, in Medicare – particularly Part B premiums – but an announcement should be made shortly.)