Each year, employee benefits professionals diligently await the release of the cost-of-living adjustments for the upcoming plan years so that various benefit limits can be properly maintained. Susan Jordan, from our Pittsburgh office share this year's with us:
In a news release (IR-2010-108) on October 28, 2010, the IRS announced the cost-of-living adjustments to the various dollar limitations applicable to qualified retirement plans for 2011. Virtually all of the limitations remain unchanged for the second consecutive year.
1. LIMIT ON COMPENSATION: The maximum amount of compensation that may be counted for plan purposes is $245,000 for plan years beginning in 2011, as in 2009 and 2010.
2. LIMITS ON CONTRIBUTIONS AND BENEFITS. The maximum limit on annual additions to a defined contribution plan is unchanged at $49,000. The maximum annual benefit which may be accrued under a defined benefit plan will remain $195,000 as in 2010.
3. 401(k) DEFERRAL LIMIT. For purposes of 401(k) plans, the maximum limitation on voluntary salary deferrals for calendar year 2011 is $16,500 as in the past two years, while the limit on catch-up deferrals by those age 50 or older stays at $5,500.
4. IDENTIFICATION OF HIGHLY COMPENSATED AND KEY EMPLOYEES. Effective for plan years beginning in 2011, as in 2010, a Highly Compensated Employee is any employee who (a) was a 5% owner during the current or preceding year, or (b) who received compensation from the employer during the preceding year in excess of $110,000. The dollar limit used to define a key employee in a top heavy plan under IRC Section 416(i)(1)(A)(i) is preserved at $160,000.
5. SEP THRESHOLD. As in 2009 and 2010, the compensation minimum for which coverage is required for a simplified employee pension plan (SEP) is $550.
6. TAXABLE WAGE BASE. As announced separately, on October 15, 2010, and as was the case for 2010, Social Security and Supplemental Security Income benefits will not be increased for any cost of living adjustment, since the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) remains statistically unchanged. In such circumstances, the statute prohibits an increase in the maximum amount of earnings subject to the Social Security tax. Consequently, the Social Security taxable wage base for 2011 will be $106,800, as in 2009 and 2010. For plan years which operate on a fiscal year basis, this wage base will remain effective for plan years beginning in 2011.
We frequently are asked to provide the contribution formula needed to maximize contributions for an individual with compensation at or above the maximum limit. The formula remains the same as applicable in 2010, so for a calendar year profit sharing plan integrated at the Social Security wage base, the contribution formula needed to achieve the maximum permissible allocation for an individual with compensation of $245,000 or more is: 16.78473% up to $106,800, plus 22.48473% in excess of $106,800 (up to $245,000)
For a calendar year 401(k) plan integrated at the Social Security wage base and using the 3% safe harbor design, the profit sharing contribution formula which, in the aggregate (with a $16,500 deferral and $7,350 safe harbor contribution), will achieve the maximum permissible allocation for an individual with compensation of $245,000 or more is: 7.05004% up to $106,800, plus 12.75004% in excess of $106,800 (up to $245,000)