On Thursday October 18, 2012 the Internal Revenue Service(IRS) announced that effective January 1, 2013 employees will be able to contribute an additional $500 a year into their 401(k)s, tax free.

The tax-free contribution limit for retirement plans will increase to $17,500 for 2013, up from $17,000 this year. This will be the second in a row that the IRS has increased the limit by $500 as a result of the rising inflation rate.

The catch-up contribution limit-the additional amount of tax-free money employees over 50 are allowed to contribute to their retirement plan- remains unchanged at $5,500 on top of the initial $17,500.

Limits for Defined Contribution Plans

Individual Limitation-
The limit on contributions made on behalf of an individual to a defined contribution plan will be increased from $50,000 to $51,000. Application of this limit will remain the lesser of 100% of pay or $51,000.

401(k) Deferrals-
The dollar limitation on employee deferrals in 401(k) plans is increased from $17,000 to $17,500. 401(k) limits are based on the calendar year regardless of plan year end.

Catch-Up Contributions-
Catch-up contribution for participants 50 years or older remains unchanged at $5,500. This is also a calendar year limit regardless of plan the year end.

Defined Benefit Plan Limits-

Effective January 1, 2013, the limitation on the annual benefit under a defined benefit plan under section 415(b)(1)(A) is increased from $200,0000 to $205,000.

Annual Compensation Limits-
The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) is increased from $250,000 to $255,000.

Key Employees-
The dollar limitation under Section 416(i)(1)(A)(i) concerning the definition of a key employee in a top-heavy plan remains at $165,000.

Highly Compensated Employees-
The limitation used in the definition of highly compensated employee under Section 414(q)(1)(B) remains at $115,000.
The impact of this is that employees who earn in excess of $115,000 in the plan year that begins in 2012 will be considered highly compensated for the plan year beginning in 2013 and an employee who earns in excess of $115,000 in 2013 will be considered highly compensated employees in 2014.
These limits are applicable to calendar year plans.