For 2016, Most Retirement Plan Limits Stay Put

Employee 401(k) contributions top off at $18,000 with $6,000 ‘catch-up’; other limits mostly unchanged

By Stephen Miller, CEBS Oct 22, 2015
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For a look back at 2015 retirement plan limits, see the SHRM Online article For 2015, 401(k) Contribution Limit Rises to $18,000.


Annual limits and maximums for 401(k) and similar defined contribution retirement plans and for defined benefit pension plans will stay largely unchanged in 2016. That’s because in most cases the slight increase in the cost-of-living index did not meet the statutory thresholds that trigger rate adjustments, the IRS announced on Oct. 21, 2015, when it also issued this chart of 2016 retirement plan limits and maximums.

Defined Contribution Plans

The IRS highlighted the following adjustments taking effect on Jan. 1, 2016:

401(k), 403(b) and profit-sharing plan elective deferrals stays at $18,000.

The catch-up contribution limit for participants age 50 or older stays at $6,000. (The catch-up limit applies from the start of the year to those turning 50 at any time during the year.)

The annual defined contribution limit from all sources (employer and employee) stays at the lessor of $53,000 (plus $6,000 catch-up if age 50 or older) or 100 percent of the employee’s compensation.

The amount of employee compensation that can be considered in calculating contributions to defined contribution plans remains at $265,000.

The limit used in the definition of a highly compensated employee for the purpose of 401(k) nondiscrimination testing remains at $120,000.

Defined Contribution Plan Limits
For 401(k), 403(b) and most 457 plans, there will be no cost of living adjustment (COLA) for dollar limits on benefits and contributions:

2016

2015

Maximum employee elective deferral

$18,000

$18,000

Employee catch-up contribution (if age 50 or older by year end)

$6,000

$6,000

Defined contribution maximum limit, all sources

$53,000

$53,000

Defined contribution maximum limit (if age 50 or older by year end) maximum contribution all sources plus catch-up

$59,000

$59,000

Employee compensation limit for calculating contributions

$265,000

$265,000

Compensation of “key employees” in a top-heavy plan

$170,000

$170,000

Compensation of “highly compensated employees” in a top-heavy plan (HCE threshold)

$120,000

$120,000


HR professionals should convey to employees their plan contribution limits for next year. Not all plan participants will be able to fund their 401(k) accounts up to the maximum, but the contribution ceiling is a goal they should keep in mind, and may encourage those who can defer extra dollars for retirement savings to do so.

“Whether it is the savings rate guided by employees around auto enrollment, or the pretax contribution limit, the signaling from employers is critical for employees,” Fredrik Axsater, CFA, senior managing director and global head of defined contribution (DC) plans at State Street Global Advisors in San Francisco, told SHRM Online. “While not increasing the maximum pretax limit of $18,000 will have a limited explicit impact on the majority of DC savers,” he noted, communicating how much employees are allowed to contribute annually “may improve the signaling to employees, highlighting the importance of retirement savings.”

Conversely, high earners may want to ensure they don’t hit the limit prior to yearend, which could mean losing out on employer matching contributions tied to paycheck deferrals.

“Highly compensated employees who may be limited in the amount that they are able to contribute to a 401(k) on a tax-preferred basis will need to increasingly look outside of a DC plan to increase their retirement savings” especially if the contribution cap continues to remain stagnant, Axsater said. Contributing the maximum allowed to a health savings account with investment offerings is one option he suggested.

“While the contribution limits haven’t changed, there’s still room to improve behaviors,” added Ross Bremem, CFA, a partner and head of DC strategies at retirement plan advisors NEPC in Boston.

“The tools are there to get participants saving at a sufficient rate,” including automatic enrollment, automatically increasing contributions each year, and using diversified default investments such as target-date funds. “Plan sponsors are looking for ways to take advantage of the tools that exist, whether it’s using auto features or looking for ways to stretch the match structure to get people contributing at higher rates.”

Aftertax (Non-Roth) Contributions

Some 401(k) plans allow participants to make additional after-tax—but non-Roth—401(k) contributions once the $18,000 (or $24,000 after age 50) participant contribution limit is exceeded, up to the IRS limit of $53,000 (or $59,000 after age 50) for 401(k) contributions from all sources in 2016.

If the plan document allows aftertax contributions and the employee follows the correct steps when converting these to a Roth IRA, the aftertax contributions become, effectively, Roth IRA contributions after conversion. That gives heavy savers more access to Roth contributions than would be the case if they relied strictly on direct Roth 401(k) and individual retirement account (IRA) contributions.

Axsater viewed this as “a benefit for a small percent of participants,” for whom it provides “fiduciary oversight offered by their plan sponsor and access to institutionally priced investment options” beyond the normal employee contribution limit.

Defined Benefit Plans

Regarding defined benefit pension plans and other retirement savings vehicles, the IRS announced that:

Annual benefit limit. The maximum annual benefit that may be provided through a defined benefit plan remains unchanged at $210,000.

Separation from service. For a participant who separates from service before Jan. 1, 2016,the limit for defined benefit plans is computed by multiplying the participant's compensation limit, as adjusted through 2015, by 1.0011. This is a decrease from the previous year, when the participant's compensation limit, as adjusted through 2014, was multiplied by 1.0178.

PBGC Premium Rates to Increase in 2016

Separately in October, the federal Pension Benefit Guaranty Corp. (PBGC), which insures private-sector defined benefit pension plans, announced 2016 premium rates for single-employer and multiemployer pension plans.

For single-employer plans, the per-participant flat premium rate for plan years beginning in 2016 is $64, up from a 2015 rate of $57.

For multiemployer plans, the per-participant flat premium rate for plan years beginning in 2016 is $27, up from a 2015 rate of $26.

The increase in the single-employer rate was provided in The Bipartisan Budget Act of 2013. The increase in the multiemployer rate is the result of indexing for inflation.

Variable-Rate Premiums

Underfunded single-employer plans will see their variable-rate premium (VRP) increase to $30 per $1,000 of unfunded vested benefits in 2016, up from $24 in 2015.

The VRP is capped at $500 times the number of participants in 2016, up from a 2015 cap of $418.

Plans sponsored by small employers (generally fewer than 25 employees) may be subject to an even lower VRP cap. Multiemployer plans do not pay a VRP.

Under the terms of the October 2015 budget agreement congressional leaders reached with the White House, PBGC flat-rate and variable-rate premiums for single-employer plans will increase by more than the inflation rate beginning in 2017.

Terminated Plan Benefits

The PBGC also announced that the annual maximum guaranteed benefits for terminated plans (single-employer) will stay the same in 2016, at $60,136 for a 65-year-old retiree. The maximum represents the cap on what PBGC guarantees, but the agency in some cases pays more if there are sufficient plan assets or the PBGC can recover other assets from the plan sponsor. Employees retiring before age 65, or their designated beneficiaries, have reduced guarantee amounts that vary by age and other factors.


Other Workplace Retirement Plans

For SIMPLE (savings incentive match plan for employees of small employers) retirement accounts, the maximum contribution limit remains unchanged at $12,500.

For simplified employee pensions (SEPs), the minimum compensation amount remains unchanged at $600, and the maximum compensation limit will remain unchanged at $265,000. The annual contribution limit stays at $53,000.

Non-401(k) Workplace Retirement Plan Limits

2016

2015

SIMPLE maximum employee deferrals

$12,500

$12,500

SIMPLE catch-up deferrals

$3,000

$3,000

SEP minimum/maxiumum compensation

$600 to $265,000

$600 to $265,000

SEP maximumcontribution

$53,000

$53,000

Social Security wage base

$118,500

$118,500


Employee Stock Ownership Plans

In an employee stock ownership plan (ESOP), the maximum account balance in the plan subject to a five-year distribution period will remain unchanged at $1,070,000, while the dollar amount used to determine the lengthening of the five-year distribution period remains unchanged at $210,000.

IRAs

The limit on annual contributions to an IRA will stay at $5,500. The additional catch-up contribution limit for individuals ages 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.

But some IRA limits will increase for 2016:

Roth income phase-out. The AGI phase-out range for taxpayers making contributions to a Roth IRA is $184,000 to $194,000 for married couples filing jointly, up from $183,000 to $193,000. For singles and heads of household, the income phase-out range is $117,000 to $132,000, up from $116,000 to $131,000.

For an IRA contributor not covered by a workplace retirement plan but married to someone who is covered, the deduction is phased out if the couple’s income is between $184,000 and $194,000, up from $183,000 and $193,000.

Saver’s Credit

Among the few other changes announced by the IRS, the adjusted gross income limit for the saver’s credit (also known as the retirement savings contributions credit) for low- and moderate-income workers will rise to $61,500 for married couples filing jointly, up from $61,000 in 2015; $46,125 for heads of household, up from $45,750; and $30,750 for singles and married couples filing separately, up from $30,500.

The saver’s credit helps offset part of the initial contribution workers voluntarily make to 401(k) plans, similar workplace retirement programs or IRAs.

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow me on Twitter.

Related SHRM Articles:

2016 Limits for Commuting, Adoption, FSAs and Other Plans, SHRM Online Benefits, October 2015

2016 Payroll Tax Unchanged; Tax Brackets Nudge Up, SHRM Online Compensation, October 2015

IRS Issues 2016 HSA Contribution Limits, SHRM Online Benefits, May 2015

Related Resource:

Retirement Topics - 401(k) and Profit-Sharing Plan Contribution Limits, IRS, October 2015

IRS Announces IRA and Plan Limits for 2016 (IRA income ranges and Saver’s Credit limits), Appleby Retirement Dictionary, October 2015


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