The Internal Revenue Service has announced a number of adjustments to employee benefit plan dollar limitations and thresholds for 2012 as a result of the increases in the applicable cost-of-living indexes. The following limits and thresholds are effective for plan years and limitation years beginning in 2012:
Retirement Plan Cost-of-Living Adjustments
- Elective Deferral Contributions. The annual limitation on elective deferrals to Section 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan is increased from $16,500 to $17,000.
- Covered Compensation. The annual limit on the amount of a participant’s total compensation that can be taken into account under a qualified plan will increase from $245,000 to $250,000.
- Defined Contribution Annual Addition Limit. The dollar limitation on aggregate annual additions (including contributions and forfeiture allocations) under an employer’s defined contribution plans will increase from $49,000 to $50,000.
- Defined Benefit Maximum. The annual benefit limitation under an employer’s defined benefit plans will increase from $195,000 to $200,000.
- Key Employees. The dollar threshold on compensation for determining whether an officer is to be classified as a “key employee” under a top-heavy plan will increase from $160,000 to $165,000. Thus, an officer earning more than $165,000 in 2012 will be treated as a key employee that year.
- Highly Compensated Employees. The dollar threshold on compensation that is used to determine whether one is to be classified as a “highly compensated employee” (HCE) will increase from $110,000 to $115,000. Thus, under the “look-back” rule, an individual earning more than $115,000 in 2012 will be treated as an HCE for 2013. For the year 2012 under the look-back rule, an individual will be treated as an HCE if his or her compensation for 2011 exceeded $110,000. Please note that if the employer elects to apply the “top-20%” rule for determining HCEs, some individuals with compensation above these limits may not be considered HCEs.
- Compensation Limit for Governmental Plans. The annual compensation limit for certain grandfathered governmental plans is increased from $360,000 to $375,000.
- ESOPs. The dollar amount for determining the maximum account balance in an employee stock ownership plan subject to a five-year distribution period will increase from $985,000 to $1,015,000, while the amount used to determine the lengthening of the five-year distribution period will increase from $195,000 to $200,000.
Individual Retirement Account (IRA) Adjustments
- The deductible amount for IRAs for an individual making qualified retirement contributions remains unchanged at $5,000.
- The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by an employer-sponsored retirement plan and have modified adjusted gross income (AGI) between $58,000 and $68,000, up from $56,000 and $66,000 in 2011. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by an employer-sponsored retirement plan, the phase-out range is $92,000 to $112,000, up from $90,000 to $110,000. For an IRA contributor who is not covered by an employer-sponsored retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s modified AGI is between $173,000 and $183,000, up from $169,000 and $179,000.
- The modified AGI phase-out range for taxpayers making contributions to a Roth IRA is $173,000 to $183,000 for married couples filing jointly, up from $169,000 to $179,000 in 2011. For singles and heads of household, the phase-out range is $110,000 to $125,000, up from $107,000 to $122,000. For a married individual filing a separate return who is covered by an employer-sponsored retirement plan, the phase-out range remains $0 to $10,000.
Retirement Plan Limits Which Are Unchanged
- Age 50 and Older Catch-Up Contributions. The annual limit for catch-up contributions for individuals aged 50 or over under Section 401(k) plans, Section 403(b) annuity contracts and eligible Section 457 plans sponsored by governmental entities will remain unchanged at $5,500. For SIMPLE 401(k) or IRA accounts, the annual limit will remain unchanged at $2,500.
- Contributions to Simplified Employee Pension Plans and SIMPLE Retirement Plans . The minimum compensation that will require a simplified employee pension contribution will remain at $550 and the annual limit for salary reductions under a SIMPLE retirement plan will also stay at $11,500.
Other 2012 Benefits-Related Limits
- Health Savings Accounts (HSAs). The 2012 annual deduction limit for contributions to an HSA for an individual with self-only coverage under a high-deductible health plan (HDHP) will be $3,100. For an individual with family coverage under an HDHP, the limit will be $6,250. An HDHP will need to have an annual deductible that is not less than $1,200 for self-only coverage or $2,400 for family coverage; these amounts are not changed from the 2011 levels. In addition, the annual out-of-pocket expenses (deductibles, co-payments and other amounts, but not premiums) may not exceed $6,050 for self-only coverage or $12,200 for family coverage. Individuals age 55 and older who are covered by an HDHP can make additional “catch-up” contributions each year until they enroll in Medicare. By statute, the catch-up contribution limit for 2012 and the subsequent years will be $1,000.
- Transportation Fringe Benefits. The American Recovery and Reinvestment Tax Act of 2009 provided a temporary increase in the amount excludable from gross income for certain employer-provided transportation fringe benefits, which was extended through 2011 by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. However, no further extension is in place for 2012. Thus, for taxable years beginning in 2012, the monthly limit for the aggregate fringe benefit exclusion amount for transportation in a commuter highway vehicle and any transit pass will be $125 and the fringe benefit exclusion amount for qualified parking will be $240.
- Long-Term Care Insurance Premiums. Long-term care insurance premiums qualify as deductible “medical care” costs up to certain limits for a taxable year. The applicable inflation-adjusted limits for 2012 are available to view in the table here.
The HSA and long-term care insurance limits reflect slight increases from 2011; these limits are not adjusted using the same cost-of-living index used for retirement plan limits.
Social Security Wage Base
In addition to the above cost-of-living adjustments, the Social Security Administration has announced an increase in the Social Security wage base from $106,800 in 2011 to $110,100 in 2012.