Pension Plan Limitations for 2012

The Internal Revenue Service has announced the annual cost-of-living adjustments applicable to dollar limitations for pension plans and other items for Tax Year 2012. For the first time in three years the increase in the cost-of-living index met the statutory thresholds that triggered the adjustment of many of the limitations:

Limitations that Have Increased

• Limitations Adjusted under, or by Reference to, Code section 415
  • The maximum amount of elective deferrals that may be made to 401(k) plans, 403(b) annuities, simplified employee pensions (“SEPs”), and 457(b) plans is increased from $16,500 to $17,000 (Code sections 402(g)(1) and 457(e)(15)).
  • The limitation on annual additions under defined contribution plans is increased from $49,000 to $50,000 (Code section 415(c)(1)(A)).
  • The annual limit on compensation for plan purposes is increased from $245,000 to $250,000 (Code sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii)).
  • The dollar limitation used for the definition of key employee in a top-heavy plan is increased from $160,000 to $165,000 (Code section 416(i)(1)(A)(i)).
  • The limitation used in the definition of highly compensated employee is increased from $110,000 to $115,000 (Code section 414(q)(1)(B)).
  • The limitation on annual benefits under a defined benefit plan is increased from $195,000 to $200,000 (Code section 415(b)(1)(A)).
  • The adjustment to the limitation on annual benefits is made under a special rule that takes into account recent history of changes in the cost-of-living. This year, the application of this special rule resulted in increases in the adjustment factor for several years. For participants who separated from service before January 1, 2010, the defined benefit limitation is computed by multiplying the participant’s compensation limitation, as adjusted through 2011, by 1.0327. For participants who separated from service in 2010 or 2011, the defined benefit limitation is computed by multiplying the participant’s compensation limitation, as adjusted through 2011, by 1.0376 (Code sections 415(b)(1)(A), Regs. section 1.415(d)-1(a)92(ii)).
  • The dollar amount for determining the maximum account balance in an employee stock ownership plan subject to a 5-year distribution period is increased from $985,000 to $1,015,000, while the dollar amount used to determine the lengthening of the 5-year distribution period is increased from $195,000 to $200,000 (Code section 409(o)(1)(C)(ii)).
  • The annual compensation limitation for eligible participants in certain governmental plans that, under the plan as in effect on July 1, 1993, allowed cost-of-living adjustments to the compensation limitation under the plan to be taken into account, is increased from $360,000 to $375,000 (Code section 401(a)(17)).
  • The compensation amounts used in defining “control employee” for fringe benefit valuation is increased from $95,000 to $100,000 for Board or shareholder-appointed, confirmed, or elected officers of the employer and from $195,000 to $205,000 for all other employees of the employer (Reg. sections 1.61–21(f)(5)(i) and 1.61–21(f)(5)(iii)).
• Limitations Adjusted under other Sections of the Code
  • The adjusted gross income limitation that applies to the 50% level of retirement savings contribution credit for qualified retirement savings contributions is increased as follows (Code section 25B(b)(1)(A)):
    • For married taxpayers filing a joint return, the limitation is increased from $34,000 to $34,500.
    • For a taxpayers filing as head of household, the limitation is increased from $25,500 to $25,875.
    • For all other filers, the limitation is increased from $17,000 to $17,250.
  • The adjusted gross income limitation that applies to the 20% level of retirement savings contribution credit for qualified retirement savings contributions is increased as follows (Code section 25B(b)(1)(B)):
    • For married taxpayers filing a joint return, the limitation is increased from $36,500 to $37,500.
    • For a taxpayers filing as head of household, the limitation is increased from $27,375 to $28,125.
    • For all other filers, the limitation is increased from $18,250 to $18,750.
  • The adjusted gross income limitation that applies to the 10% level of retirement savings contribution credit for qualified retirement savings contributions is increased as follows (Code section 25B(b)(1)(C) and (D)):
    • For married taxpayers filing a joint return, the limitation is increased from $56,500 to $57,500.
    • For a taxpayer filing as head of household, the limitation is increased from $42,375 to $43,125.
    • For all other filers, the limitation is increased from $28,250 to $28,750 (Code section 25B(b)(1)).
  • The applicable dollar amount used for determining the deductible amount of an IRA contribution is increased as follows:
    • For a taxpayer who is an active participant filing a joint return or filing as a qualifying widow(er), the applicable dollar amount is increased from $90,000 to $92,000 (Code section 219(g)(3)(B)(i)).
    • For a taxpayer who is not an active participant but whose spouse is an active participant, the applicable dollar amount is increased from $169,000 to $173,000(Code section 219(g)(7)(A)).
    • The applicable dollar amounts for all other taxpayers (other than married taxpayers filing separate returns) is increased from $56,000 to $58,000 (Code sections 219(g)(3)(B)(ii)).
  • The adjusted gross income limitation used for determining the maximum Roth IRA contribution is increased as follows:
    • For married taxpayers filing a joint return and for a taxpayer filing as a qualifying widow(er) the limitation is increased from $169,000 to $173,000 (Code section 408A(c)(3)(C)(ii)(I)).
    • For all other taxpayers (other than married taxpayers filing separate returns) the limitation is increased from $107,000 to $110,000 (Code section 408A(c)(3)(C)(ii)(II)).
  • The dollar amount used to determine excess employee compensation with respect to a single-employer defined benefit pension plan for which the special election under section 430(c)(2)(D) has been made is increased from $1,014,000 to $1,039,000 (Code section 430(c)(7)(D)(i)(II)).

Limitations which Remain Unchanged

• The maximum amount of catch-up contributions that individuals aged 50 or over may make to 401(k) plans, 403(b) annuities, SEPs, and 457(b) plans remains unchanged at $5,500 (Code section 414(v)(2)(B)(i)).
• The maximum amount of catch-up contributions that individuals aged 50 or over may make to SIMPLE 401(k) Plans or SIMPLE Retirement Accounts remains unchanged at $2,500 (Code section 414(v)(2)(B)(ii)).
• The limitation on the exclusion for elective deferrals to SIMPLE retirement accounts remains unchanged $11,500 (Code section 408(p)(2)(E)).
• The deductible amount for an individual making qualified retirement contributions remains unchanged at $5,000 (Code section 219(b)(5)(A)).
• The minimum compensation amount used for determining required participation in SEPs remains unchanged at $550 (Code section 408(k)(2)(C)).