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IRS Retirement Plan Limitations for 2016

November 4, 2015

The Internal Revenue Service (IRS) has issued the new 2016 retirement plan limitations. In this announcement, the IRS sets forth the limits of the amounts that can be deferred under 401 (k) plans, 457 (b) plans and the catch-up contribution amount to 401 (k) and 403 (b) plans. Also, the IRS announcement provides the amount that determines whether an individual is a highly compensated employee, the maximum amount of compensation that can be taken into account when computing plan contributions under defined contribution plans, the dollar limitation for determining if someone is a “key employee,” and the Social Security (FICA) taxable age base.

The amount which can be deferred under 401(k) plans and 457(b) plans remains at $18,000.  The catch-up contribution limit for 401(k) and 403(b) plans (for those who are age 50 or older during 2016) remains at $6,000.  The amount for determining if an individual is a highly compensated employee (sometimes referred to as an “HCE”) remains at $120,000.  Thus, one way in which an employee will be considered to be an HCE in 2016 is if he or she earns more than $120,000 in 2015.

The maximum amount of compensation that can be taken into account when computing plan contributions under defined contribution plans; such as profit sharing plans and 401(k) plans, and accrued benefits under defined benefit pension plans, remains at $265,000.  The maximum dollar amount which can be contributed to the account of a participant in a defined contribution plan for 2016 remains at $53,000.  The maximum benefit payable annually in the form of a straight life annuity from defined benefit pension plans remains at $210,000.

Another other important limit is the dollar limitation for determining if someone is a “key employee” - this dollar limitation of $170,000 is unchanged from 2015.  The identification of a “key employee” is meaningful for two reasons. If the present value of accrued benefits of key employees under a defined benefit pension plan are more than 60% of the accrued benefits of all participants under the plan, or if the account balances of key employees under a defined contribution plan are more than 60% of the account balances of all participants under a defined contribution plan, then the plan is considered to be “top-heavy” and certain minimum benefits or contributions must be provided to non-key employee participants in the plan.  In addition, for companies whose stock is publicly-traded and that sponsor a non-qualified deferred compensation plan which is subject to Code Section 409A, a “key employee” who participates in the plan cannot receive an employment termination distribution from the plan until six (6) months after he or she terminates.

One final adjustment announced by the IRS is that the Social Security (FICA) taxable age base remains at $118,500.  This amount is important for retirement plans that have contribution formulas that are integrated with Social Security.  In addition, this wage base impacts both employers and employees in that employees who earn more than the wage base do not pay the Social Security FICA tax on wages which exceed the wage base.  On the other hand, there is no wage limit on the application of the Medicare (HI) portion of the Social Security tax.

For all of the new IRS cost-of-living adjustments for 2016 as well as the limits for 2015, 2014, and 2013 for comparison purposes please see table below.

IRS Retirement Plan Limitations for 2016 and 3 Prior Years

Code Section

2016

401(a)(17)/ 404(1) Annual Compensation

$265,000

402(g)(1) Elective Deferrals

18,000

408(k)(2)(C) SEP Minimum Compensation

600

408(k)(3)(C) SEP Maximum Compensation

265,000

408(p)(2)(E) SIMPLE Maximum

Contributions

12,500

409(o)(1)(C) ESOP Limits

1,070,000

210,000

414(q)(1)(B) HCE threshold

120,000

414(v)(2)(B)(i) Catch-up Contribution

6,000

414(v)(2)(B)(ii) Catch-up Contribution

3,000

415(b)(1)(A) DB Limits

210,000

415(c)(1)(A) DC Limits

53,000

416(i)(1)(A)(i) Key EE

170,000

457(e)(15) Deferral Limit

18,000

1.61-21(f)(5)(i) Control EE

105,000

1.61-21(f)(5)(iii) Control EE

215,000

219(b)(5)(A) IRA Contribution Limit

5,500

219(b)(5)(B) IRA Catch-Up Contributions

1,000

OASDI Taxable Wage Base

118,500

Code Section

2015

2014

2013

401(a)(17)/ 404(1) Annual Compensation

$265,000

$260,000

255,000

402(g)(1) Elective Deferrals

18,000

17,500

17,500

408(k)(2)(C) SEP Minimum Compensation

600

550

550

408(k)(3)(C) SEP Maximum Compensation

265,000

260,000

255,000

408(p)(2)(E) SIMPLE Maximum Contributions

12,500

12,000

12,000

409(o)(1)(C) ESOP Limits

1,070,000

210,000

1,050,000

210,000

1,035,000

205,000

414(q)(1)(B) HCE threshold

120,000

115,000

115,000

414(q)(1)(C)

---

--

-

414(v)(2)(B)(i) Catch-up Contribution

6,000

5,500

5,500

414(v)(2)(B)(ii) Catch-up Contribution

3,000

2,500

2,500

415(b)(1)(A) DB Limits

210,000

210,000

205,000

415(b)(2)(G) DB Limits

---

---

---

415(c)(1)(A) DC Limits

53,000

52,000

51,000

416(i)(1)(A)(i) Key EE

170,000

170,000

165,000

457(e)(15) Deferral Limit

18,000

17,500

17,500

4980A(c)(1) Excess Distributions

---

---

---

1.61-21(f)(5)(i) Control EE

105,000

105,000

100,000

1.61-21(f)(5)(iii) Control EE

215,000

210,000

205,000

219(b)(5)(A) IRA Contribution Limit

5,500

5,500

5,500

219(b)(5)(B) IRA Catch-Up Contributions

1,000

1,000

1,000

OASDI Taxable Wage Base

118,500

117,000

113,700

Disclosure Under Treasury Circular 230: The United States Federal tax advice contained in this document and its attachments, if any, may not be used or referred to in the promoting, marketing or recommending of any entity, investment plan or arrangement, nor is such advice intended or written to be used, and may not be used, by a taxpayer for the purpose of avoiding Federal tax penalties.  Advice that complies with Treasury Circular 230’s “covered opinion” requirements (and thus, may be relied on to avoid tax penalties) may be obtained by contacting the author of this document.

Bernard G. Peter
T:+1.312.460.4255
peter@millercanfield.com