In a news release (IR-2014-99) on October 23, 2014, the IRS announced the cost-of-living adjustments to the various dollar limitations applicable to qualified retirement plans for 2015. As had been widely predicted, most of the limitations have been increased.
Limit on Compensation
The maximum amount of compensation that may be counted for plan purposes for plan years beginning in 2015 is $265,000, up $5,000 from the $260,000 limitation applicable in 2014. This limitation applies for calendar year 2015 and for limitation years beginning in 2015.
Limits on Contributions and Benefits
The maximum limit on annual additions to a defined contribution plan is increased from $52,000 to $53,000. However, the maximum annual benefit that may be accrued under a defined benefit plan remains unchanged at $210,000. These limitations are applicable for calendar year 2015 and for limitation years ending within 2015.
401(k) Deferral Limit
For purposes of 401(k) and 403(b) plans, the maximum limitation on voluntary salary deferrals is increased for calendar year 2015 from $17,500 to $18,000, and the limit on catch-up deferrals by those age 50 or older, which had been fixed for the last six years at $5,500, is bumped to $6,000.
Identification of Highly Compensated and Key Employees
Effective for plan years beginning in 2015, a Highly Compensated Employee is any employee who (a) was a five percent owner during the current or preceding year or (b) received compensation from the employer during the preceding year in excess of $120,000. This compensation threshold had been set at $115,000 since 2012. The dollar limit used to define a key employee in a top heavy plan under IRC Section 416(i)(1)(A)(i), however, remains unchanged at $170,000.
The compensation minimum for which coverage is required for a simplified employee pension plan (SEP) is increased from $550 to $600.
Taxable Wage Base
As announced by the Social Security Administration on October 22, 2014, the Social Security taxable wage base for 2015 will be $118,500, an increase of just 1.28 percent from $117,000 which was the wage base for 2014. For plan years that operate on a fiscal year basis, this wage base will be effective for plan years beginning in 2015.
We are frequently asked to provide the contribution formula needed to maximize contributions for an individual with compensation at or above the maximum limit. The following have been calculated based on the new wage base and these cost-of-living adjustments:
- For a calendar year profit-sharing plan integrated at the Social Security wage base, the contribution formula needed to achieve the maximum permissible allocation for an individual with compensation of $265,000 or more is:
- 16.84886% up to $118,500, plus 22.54886% in excess of $118,500 (up to $265,000)
- For a calendar year 401(k) plan integrated at the Social Security wage base and using the three percent safe harbor design, the profit-sharing contribution formula that, in the aggregate (with a $18,000 deferral and $7,950 safe harbor contribution), will achieve the maximum permissible allocation for an individual with compensation of $265,000 or more is:
- 7.05641% up to $118,500, plus 12.75641% in excess of $118,500 (up to $265,000)