(b)lines Ask the Experts – Will Deferral Limits Rise for 2017?

Michael A. Webb, vice president, Cammack Retirement Group, and David Levine, with Groom Law Group answer:  

Any estimates as to what the 402(g) elective deferral limit at this point are just that—estimates. The actual deferral limits for 2017 are not released until late October (last year the Internal Revenue Service (IRS) announced the limits on October 21). The reason the IRS cannot announce the limits sooner is that the indexing of such limits is based on the change in a price index (the Consumer Price Index for All Urban Consumers, or CPI-U.) from the beginning of the fourth quarter of the prior year through the end of the third quarter of the current year, and that third quarter figure is not released until October.

However, there are entities that can and do make estimates based on the current unrounded 402(g) limits and the increase in the CPI-U from the fourth quarter of 2015 until now. These estimates are based on methodologies described in detail in a previous Ask the Experts column.   

Based on those methodologies, however, the Experts are not tremendously optimistic regarding limit increases in 2017. The reason for this is that price inflation remains relatively flat; the CPI-U actually DECREASED in July (the latest month for which figures are available as of this writing) and the figure has increased only a little more than 1% since the beginning of the fourth quarter of last year. Currently the 402(g) unrounded index figure is $18,158. It would need to increase at least $342, or nearly 2%, in order to exceed the $18,500 figure necessary for the 402(g) elective deferral limit to be increased to $18,500. Though certainly not impossible that the CPI-U will increase year-over-year by the necessary 2% that would result in an $18,500 elective deferral limit in 2017 (we still have August and September to factor into the equation) it appears to become less likely with each passing month.

One thing that is fairly certain at this point is that, barring a spike in consumer prices, the maximum amount of the age-50 catch-up is unlikely to increase from its current figure of $6,000 in 2007. The reason for this is that the unrounded limit is $6,053; it would need to increase $447, or more than 7% for the index to increase to $6,500. It is almost certain that there would not be such a large increase in the CPI-U that would be sufficient to increase this limit.

So don’t be disappointed if 2017 is another year where the elective deferral limits do not increase. However, it is important to emphasize that nothing is official regarding the 2017 deferral limits until such limits are actually released by the IRS in late October.

Thank you for your question!

NOTE: This feature is to provide general information only, does not constitute legal advice, and cannot be used or substituted for legal or tax advice.