United States

IRS releases annual retirement plan limitations

TAX ALERT  | 

Fulfilling its annual requirement to make adjustments for cost of living changes, the IRS published applicable 2019 limitations for various benefits and contributions to qualified retirement plans in Notice 2018-83. The following chart summarizes the most commonly used limitations. These limits rise in predefined increments, and in many cases, the annual cost of living adjustment is small causing little to no change in limits year to year.

Most notably, the IRA contribution limits increased after remaining the same since 2013. Meanwhile, limits on catch-up contributions remain the same for another year. Refer to the notice for other applicable limitations not shown here.

Limitation

2018

2019

Elective deferrals to section 401(k), section 403(b), certain section 457 and Thrift Savings plans

$18,500

$19,000

Catch-up contribution for those 50 and over (in section 401(k), section 403(b), certain section 457 and Thrift Savings plan)

$6,000

$6,000

Catch-up contribution for those 50 and over for SIMPLE-IRA or SIMPLE-401(k) plan

$3,000

$3,000

Defined contribution plan annual addition (or limited to compensation, if less)

$55,000

$56,000

Defined benefit plan annual benefit (or limited to 100 percent of average compensation in three highest paid years, if less)

$220,000

$225,000

Annual compensation limit (generally applicable to section 415 benefit and allocation calculations)

$275,000

$280,000

Compensation for SEP inclusion

$600

$600

SIMPLE-IRA and SIMPLE-401(k) elective deferral limit

$12,500

$13,000

Maximum IRA contribution

$5,500

$6,000

IRA catch-up contribution for those 50 and over*

$1,000

$1,000

*The IRA catch-up limit is set by statute and it does not increase for cost-of-living adjustments.

Action items

Employers

Adjustments in limitations may require employers to coordinate with their payroll provider (in-house or external) and retirement plan administrators to ensure the proper updating of plan-related systems. In addition, employers should be preparing to distribute various annual notices required for calendar year retirement plans, as applicable. The following notices are due soon:

  • Qualified Default Investment Alternative Notice – at least 30 days in advance of subsequent plan year
  • Qualified Automatic Contribution Arrangement and Eligible Automatic Contribution Arrangement Notice – between 30 and 90 days before the beginning of the plan year
  • SIMPLE IRA Notice – before Nov. 2, which begins the 60-day election period
  • Safe Harbor 401(k) Notice – between 30 and 90 days before the beginning of the plan year

Where appropriate, employers should review the news release in full and coordinate internal efforts with those of their external plan administrator to ensure processes are updated to reflect any applicable limitation changes by Jan. 1 and to comply with upcoming disclosure deadlines.

Business owners

A twist to consider for closely-held business owners who may be close to retirement is the interaction with the section 199A deduction and contributions to qualified retirement plans. For businesses that will qualify for a section 199A deduction, qualified business income will have an approximate federal tax rate of 29.6 percent while distributions from qualified retirement plans may be taxed at 37 percent if the individual is in the highest federal bracket.

On the other hand, contributions to qualified retirement plans are not included in current taxable income which may help owners fall below the income thresholds so they can qualify for the setion 199A deduction if it might otherwise be limited. Therefore, the entire landscape of the new tax system must be considered when choosing the most tax-efficient strategy for owners of pass-through entities and qualified retirement plan contributions.

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