The Internal Revenue Service (“IRS”) announced cost of living adjustments affecting dollar limitations for employer plans for tax year 2018. The IRS issued technical guidance detailing these items in Notice 2017-64, in addition to previous guidance in Rev. Proc. 2017-37 and Rev. Proc. 2017-58.
Many of the limitations will change because the increase in the cost-of-living index met the legal thresholds that trigger their adjustment. Some limitations remain unchanged because the increase in the index did not meet the statutory thresholds that give rise to their adjustment.
Retirement Plan Limitation Highlights for 2018
The following will likely be of the greatest interest to employers who sponsor retirement plans:
- The contribution limit for employees who participate in 401(k), 403(b), and most 457 plans is increased from $18,000 to $18,500.
- The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), and most 457 plans remains unchanged at $6,000.
- The limitation for defined contribution plans under Code §415(c)(1)(A) is increased in 2018 from $54,000 to $55,000.
- Effective Jan. 1, 2018, the limitation on the annual benefit under a defined benefit plan under Internal Revenue Code (“Code”) §415(b)(1)(A) is increased from $215,000 to $220,000. For a participant who separated from service before Jan. 1, 2018, the limitation for defined benefit plans under Code §415(b)(1)(B) is computed by multiplying the participant’s compensation limitation, as adjusted through 2017, by 1.0196.
- The annual compensation limit under Code §§401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) is increased from $270,000 to $275,000.
- The limitation used in the definition of highly compensated employee under Code §414(q)(1)(B) remains unchanged at $120,000.
- The dollar limitation under Code §416(i)(1)(A)(i) concerning the definition of key employee in a top-heavy plan remains unchanged at $175,000.
- The income limit for the Saver’s Credit (also known as the Retirement Savings Contributions Credit) for low- and moderate-income workers is $63,000 for married couples filing jointly, up from $62,000; $47,250 for heads of household, up from $46,500; and $31,500 for singles and married individuals filing separately, up from $31,000.
Welfare and Fringe Benefit Limitation Highlights for 2018
The IRS announced that the pre-tax salary reduction limit for health flexible spending accounts (“FSAs”) will increase to $2,650. In addition, if an employer has adopted the up to $500 carryover for the health FSA, any amount that rolls over into the new plan year does not affect the maximum election the employee can make.
For health savings accounts (“HSAs”), the IRS announced that the amount that individuals may contribute annually to their HSAs for self-only coverage will rise by $50 next year to $3,450, and will rise by $150 to $6,900 for those with family coverage.
For Qualified Transportation Fringe Benefit Plans, the monthly limitation for the fringe benefit exclusion amount for transportation in a commuter highway vehicle and any transit pass rose to $260. The monthly limitation for qualified parking is $260.
What These Changes Means for Employers
Employers that are plan sponsors should ensure that their systems and formulas are updated to include the limits that have been adjusted. These limits are effective January 1, 2018.
Additionally, employers may consider that these limitation changes will affect nondiscrimination testing results, and increase the maximum permissible profit sharing allocations and the maximum benefit available under a defined benefit plan.