Compliance October 23, 2014

Retirement Plan Deferral Limit to Increase in 2015

October 23, 2014 (PLANSPONSOR.com) - The Internal Revenue Service (IRS) announced cost of living adjustments affecting dollar limitations for retirement plans, as well as other retirement-related items for tax year 2015.
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The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $17,500 to $18,000. The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $5,500 to $6,000.

Effective January 1, 2015, the limitation on the annual benefit under a defined benefit plan under Section 415(b)(1)(A) remains unchanged at $210,000. For a participant who separated from service before January 1, 2015, the limitation for defined benefit plans under Section 415(b)(1)(B) is computed by multiplying the participant’s compensation limitation, as adjusted through 2014, by 1.0178.

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The limitation for defined contribution plans under Section 415(c)(1)(A) is increased in 2015 from $52,000 to $53,000.

The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) is increased from $260,000 to $265,000.

The dollar limitation under Section 416(i)(1)(A)(i) concerning the definition of key employee in a top-heavy plan remains unchanged at $170,000.

The dollar amount under Section 409(o)(1)(C)(ii) for determining the maximum account balance in an employee stock ownership plan subject to a five-year distribution period is increased from $1,050,000 to $1,070,000, while the dollar amount used to determine the lengthening of the five-year distribution period remains unchanged at $210,000.

The limitation used in the definition of highly compensated employee under Section 414(q)(1)(B) is increased from $115,000 to $120,000.

The dollar amount under Section 430(c)(7)(D)(i)(II) 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 $1,084,000 to $1,101,000.

Other limitations announced include:

  • The annual compensation limitation under Section 401(a)(17) 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 under Section 401(a)(17) to be taken into account, is increased from $385,000 to $395,000.
  • The compensation amount under Section 408(k)(2)(C) regarding simplified employee pensions (SEPs) is increased from $550 to $600.
  • The limitation under Section 408(p)(2)(E) regarding SIMPLE retirement accounts is increased from $12,000 to $12,500.
  • The limitation on deferrals under Section 457(e)(15) concerning deferred compensation plans of state and local governments and tax-exempt organizations is increased from $17,500 to $18,000.
  • The compensation amount under Section 1.61 21(f)(5)(i) of the Income Tax Regulations concerning the definition of “control employee” for fringe benefit valuation remains unchanged at $105,000.  The compensation amount under Section 1.61 21(f)(5)(iii) is increased from $210,000 to $215,000.
  • The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for married taxpayers filing a joint return is increased from $36,000 to $36,500; the limitation under Section 25B(b)(1)(B) is increased from $39,000 to $39,500; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D) is increased from $60,000 to $61,000.
  • The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for taxpayers filing as head of household is increased from $27,000 to $27,375; the limitation under Section 25B(b)(1)(B) is increased from $29,250 to $29,625; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D) is increased from $45,000 to $45,750.
  • The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for all other taxpayers is increased from $18,000 to $18,250; the limitation under Section 25B(b)(1)(B) is increased from $19,500 to $19,750; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D) is increased from $30,000 to $30,500.
  • The deductible amount under Section 219(b)(5)(A) for an individual making qualified retirement contributions remains unchanged at $5,500.
  • The applicable dollar amount under Section 219(g)(3)(B)(i) for determining the deductible amount of an IRA contribution for taxpayers who are active participants filing a joint return or as a qualifying widow(er) is increased from $96,000 to $98,000. The applicable dollar amount under Section 219(g)(3)(B)(ii) for all other taxpayers (other than married taxpayers filing separate returns) is increased from $60,000 to $61,000. The applicable dollar amount under Section 219(g)(3)(B)(iii) for a married individual filing a separate return is not subject to an annual cost-of-living adjustment and remains $0. The applicable dollar amount under Section 219(g)(7)(A) for a taxpayer who is not an active participant but whose spouse is an active participant is increased from $181,000 to $183,000.
  • The adjusted gross income limitation under Section 408A(c)(3)(B)(ii)(I) for determining the maximum Roth IRA contribution for married taxpayers filing a joint return or for taxpayers filing as a qualifying widow(er) is increased from $181,000 to $183,000. The adjusted gross income limitation under Section 408A(c)(3)(B)(ii)(II) for all other taxpayers (other than married taxpayers filing separate returns) is increased from $114,000 to $116,000. The applicable dollar amount under Section 408A(c)(3)(B)(ii)(III) for a married individual filing a separate return is not subject to an annual cost-of-living adjustment and remains $0.
  • The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $61,000 and $71,000, up from $60,000 and $70,000 in 2014. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $98,000 to $118,000, up from $96,000 to $116,000. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $183,000 and $193,000, up from $181,000 and $191,000. For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
  • The AGI phase-out range for taxpayers making contributions to a Roth IRA is $183,000 to $193,000 for married couples filing jointly, up from $181,000 to $191,000 in 2014. For singles and heads of household, the income phase-out range is $116,000 to $131,000, up from $114,000 to $129,000.  For a married individual filing a separate return, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
  • The AGI limit for the saver’s credit (also known as the retirement savings contribution credit) for low- and moderate-income workers is $61,000 for married couples filing jointly, up from $60,000 in 2014; $45,750 for heads of household, up from $45,000; and $30,500 for married individuals filing separately and for singles, up from $30,000.

An updated contribution/benefits limits table will be available soon on PLANSPONSOR.com.  

In addition, an updated table of plan limitations will be made available soon on the IRS website.

Benefits October 23, 2014

A Good Score for Retirement and Health Savings

October 23, 2014 (PLANSPONSOR.com) – Saving for retirement and health care expenses was a priority for employees of all ages during the first half of 2014, a new report shows.
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Millennials in particular seem to be more energized about saving and investing for the long term, according to the Bank of America Merrill Lynch 401(k) Wellness Scorecard. The semiannual report suggests increased mobile access, 401(k) auto-features, and more personalized advice have made employee benefit plans more valuable and easier to use for the typical participant.

The shifting 401(k) landscape seems to be drawing in younger employees with the most success. The Scorecard shows nearly 40,000 Millennials enrolled in their employer’s 401(k) plan for the first time during the first half of the year—a 55% rise from the same six-month period last year. Across all generations, the report found a 37% increase among first-time contributors, further demonstrating the spikes in interest from younger cohorts of workers looking to take charge of their long-term financial picture. Researchers suggest the growth could mean this age group appreciates the need to save for a future with greater health care costs and a lack of defined benefit pension coverage.

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Other key insights from the new Scorecard show strong growth for health savings account (HSA) usage, which increased 33% during the first six months of 2014. More than 384,000 workers now utilize these tax-advantaged vehicles to prepare for qualified near- and long-term medical expenses. While Baby Boomers and Gen Xers make up the majority of account holders, at 38% and 39%, respectively, Millennials are 23% of the HSA market—suggesting more workers are using the accounts earlier in their careers.

“Seeing younger generations more vigorously engaged with workplace savings vehicles is encouraging,” says David Tyrie, head of retirement and personal wealth solutions for Bank of America Merrill Lynch. “These actions represent significant steps toward achieving long-term financial wellness in an era of rising health care costs, increasing longevity and self-reliance due to fewer pension plans.”

The Scorecard also looks at participant engagement with Bank of America Merrill Lynch’s Benefits OnLine Mobile site. Site traffic increased 41% during the first six months of 2014, with approximately 170,500 unique users accessing their benefits via a mobile device, up from 120,500 during the same period last year. This is further demonstration that participants want to receive education and information about their benefit plans on the go, the report says.

Another positive finding in the report shows employers continue to seek proactive ways to help their employees achieve their retirement goals and improve their overall financial wellness. Results from the report show that, during the 12-month period ending June 30, 2014, the number of 401(k) plans combining auto-enrollment and auto-escalation grew 19% compared with the same period a year earlier.

Other findings on automatic plan features show nearly all employers (94%) that added auto-enrollment during the first half of this year also added auto-increase provisions, compared with 50% during the same period last year.

Overall, more plan sponsors are adding “voluntary auto-increase” to their plans, the Scorecard shows, with a 63% increase in adoption of this feature during the last 12 months. As the Scorecard explains, voluntary auto-increase must be activated by a participant before taking effect, as opposed to true auto-increase provisions, which are activated when an employee joins a given plan. Employees are responding to this feature, as evidenced by a 27% increase in the number of participants activating auto-increase.

“With intuitive plan design strategies, companies are making access to financial benefit plans and decision-making about enrollment and contribution rates easier, and helping employees achieve better outcomes through personalized education and advice,” explains Steve Ulian, head of institutional business development for Bank of America Merrill Lynch. “By further integrating how employees save for retirement and long-term health care costs, employers can help people see a more complete picture of their financial wellness and make informed choices.”

One feature of the Scorecard breaks down the expected sources of retirement income for each generation with some representation in the U.S. workforce, from Millennials to the Silent Generation (those ages 69 to 89).

Moving from the oldest generation to the youngest, there is a clear trend of decreasing expectations for pensions and Social Security to deliver retirement income. For example, while the Silent Generation expects to get 55% of total retirement income from Social Security, Millennials anticipate getting just 26% of retirement income from the government program.

Interestingly, defined benefit pension plans account for only 22% of expected retirement income for the Silent Generation, falling to 19% for Baby Boomers, and 12% for Generation X and Millennials. Also striking is that Millennials expect to get up to 26% of retirement income from “employment income,” showing they may not picture retirement the same way as older generations. Boomers, for instance, expect to get only 17% of income from employment in retirement, and the Silent Generation expects only 5% of retirement income from this source.

To access the Bank of America Merrill Lynch 401(k) Wellness Scorecard, clickhere. The report’s 401(k) data is based on Bank of America Merrill Lynch’s proprietary business, which comprises $129 billion in plan assets across more than 2.5 million plan participants.

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