IRS Raises 401(k) Contribution Limit

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.


IRS Provides Guidance on Health FSA $2,500 Limits

In a recent Notice, the IRS provided guidance on the effective date of the $2,500 limit on salary reduction contributions to health flexible spending arrangements (“Health FSAs”) and on when plans should be amended to comply with the limit

Background. Under the Patient Protection and Affordable Care Act (“PPACA” or “Health Care Reform”), the annual contributions permitted for an employee under the Health FSA component of a Cafeteria Plan will be capped at $2,500. This is effective for “taxable years” beginning after Dec. 31, 2012.

New guidance. Notice 2012-40 provides the following guidance and clarifications regarding the $2,500 limit.

  • The $2,500 limit does not apply for plan years that begin before 2013.
  • The term “taxable year” refers to the plan year of the cafeteria plan (and not the tax year of the employee or employer). This means the period for which salary reduction elections are made.
  • If a cafeteria plan has a short plan year beginning after 2012, the $2,500 limit must be prorated accordingly.
  • The $2,500 Health FSA cap does not apply to any other “flex credit” offered under a Cafeteria Plan (such as dependent care assistance).
  • Plans may adopt the required amendments to reflect the $2,500 limit at any time through the end of calendar year 2014, provided that they otherwise operate in accordance with the new limit requirements.
  • In the case of a plan providing the optional grace period, unused salary reduction contributions to the health FSA for plan years beginning in 2012 or later that are carried over into the grace period for that plan year will not count against the $2,500 limit for the subsequent plan year.
  • If one or more employees are erroneously allowed to elect a salary reduction exceeding the Health FSA limit, the Cafeteria Plan will not lose its qualified status if: (1) the terms of the Plan apply uniformly to all participants, (2) the error was a reasonable mistake and not due to willful neglect, and (3) the excess amount is paid to the employee and treated as taxable wages.