For 2012, IRS Raises Retirement Plan Contribution Limits

By Stephen Miller, CEBS Oct 21, 2011

updated 11/30/2011

The U.S. Internal Revenue Service (IRS) on Oct. 20, 2011, announced cost-of-living adjustments (COLAs) affecting dollar limits for defined contribution and defined benefit retirement plans and other retirement-related items for tax year 2012. Many plan limits on contributions and benefits will rise because increases in the cost-of-living index met the statutory thresholds that trigger their adjustment.

Among the key changes effective as of Jan. 1, 2012:

Defined Contribution Plans

  • 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 increases from $16,500 to $17,000.
  • The catch-up contribution limit for those age 50 and older remains unchanged at $5,500. The catch-up contribution may be made as of Jan. 1, 2012, by participants who will reach age 50 at any time during the year.
  • The overall limit for defined contribution plan deferrals from all sources (employer and employee combined) increases from $49,000 to $50,000 per participant.
  • The amount of employee compensation limit that can be considered in calculating contributions to defined contribution plans increases from $245,000 to $250,000.
  • The limit used in the definition of a highly compensated employee for 401(k) nondiscrimination testing purposes increased from $110,000 to $115,000.
  • The limit used in the definition of a key employee in a top-heavy plan increases from $160,000 to $165,000.

Defined Contribution Plans:

COLA Increases for Dollar Limits on Benefits and Contributions



Maximum elective deferral by employee



Catch-up contribution (age 50 and older during 2012)



Defined contribution maximum deferral (employer/employee combined)



Employee annual compensation limit for calculating contributions



Annual compensation of "key employees" in a top-heavy plan



Annual compensation of "highly compensated employee" in a top-heavy plan



Plans may see marginally better nondiscrimination testing results—including actual deferral percentage (ADP) test results—if there are fewer highly compensation employees (HCEs), blogged retirement planning firm Van Iwaarden Associates. "It could potentially make a big difference for smaller plans that were very close to failing the tests," according to the firm. "Fewer HCEs means that there are fewer participants who must receive 401(k) deferral refunds if the plan fails the ADP test."

(For a discussion of the often confusing distinction between "key employees" and "highly compensated employees" in annual nondiscrimination testing, see the SHRM Online article "Clearing Annual 401(k) Compliance Test Hurdles.")


IRS Indexed Limit Changes Snub Baby Boomers
Why didn't the age 50 and over catch-up contribution change?
By Anthony Agbay, The Agbay Group

One plan limit affecting many participants, and Baby Boomers in particular, has remained static for the fifth consecutive year—the 401(k) catch-up contribution for employees age 50 and over remains unchanged in 2012.

The Consumer Price Index for all Urban Consumers (CPI-U) is the gauge used to determine if limits increase. The inflation rate is measured from the third calendar quarter of the prior year to the third quarter of the current year. This rate will determine the inflation factor to apply to the limit for the following calendar year.

The challenge with the age 50 and over catch-up is the amount is indexed in increments of $500, which is a large percentage of $5,500 (9 percent). This means the CPI-U has to increase over 9 percent for this limit to be raised. Compare that to the primary employee deferral limit (known as the section 402(g) limit), where the CPI-U only needs to increase by more than 3 percent ($500 divided by $17,000 in 2012) for that limit to increase.

Since the CPI-U has not increased anywhere near 9 percent in recent years, more time must pass, with more inflation, before there is an increase in the age-50 catch-up amount.

Anthony Agbay is president of The Agbay Group, a division of Leonard & Company. He is a registered investment advisor specializing in fiduciary oversight strategies and retirement plan services and can be reached at

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

Defined Benefit Plans

  • Themaximum annual benefit that can be funded through a defined benefit plan increases from $195,000 to $200,000.
  • For a participant who separated from service before Jan. 1, 2010, the limit under a defined benefit plan for 2012 is computed by multiplying the participant's 2011 compensation limit by 1.0327 in order to reflect changes in the cost-of-living index from the quarter ended Sept. 30, 2008, to the quarter ended Sept. 30, 2011.
  • For a participant who separated from service during 2010 or 2011, the limit under a defined benefit plan for 2012 is computed by multiplying the participant's 2011 compensation limit by 1.0376 in order to reflect changes in the cost-of-living index from the quarter ended Sept. 30, 2010, to the quarter ended Sept. 30, 2011.
  • The Pension Benefit Guarantee Corp.'s (PBGC) per-participant flat-rate premium will stay the same in 2012 as in 2011 for both single-employer plans ($35) and multiemployer plans ($9), the agency announced. By law, the premium rates are adjusted for inflation each year based on changes in the national average wage index. The PBGC is responsible for paying the benefits of more than 1.5 million people in failed pension plans.
  • The PBGC'syearly maximum benefit for 65-year-old retirees who get their pension from PBGC has increased to $55,840.92 from $54,000 in effect since 2009, the PBGC announced separately. The amount PBGC pays retirees is based on a formula prescribed by federal law. Yearly amounts are higher for people older than age 65, and lower for those who retire earlier or choose survivor benefits. If a pension plan ends in 2012, but a retiree does not begin collecting benefits until a future year, the 2012 rates still apply.


  • The deduction for taxpayers making contributions to a traditional individual retirement account (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) from $58,000 to $68,000, up from $56,000 and $66,000 in 2011.
  • For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the AGI phase-out range is $92,000 to $112,000, up from $90,000 to $110,000.
  • 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 for couples with AGI from $173,000 to $183,000, up from $169,000 and $179,000.
  • For a Roth IRA, the AGI phase-out range for taxpayers making contributionsis $173,000 to $183,000 for married couples filing jointly, up from $169,000 to $179,000 in 2011. For singles and heads of household, the income phase-out range is $110,000 to $125,000, up from $107,000 to $122,000. For a married individual filing a separate return who is covered by a retirement plan at work, the phase-out range remains $0 to $10,000.
  • The AGI limit for the saver’s credit (also known as the retirement savings contributions credit) for low-and moderate-income workers is $57,500 for married couples filing jointly, up from $56,500 in 2011; $43,125 for heads of household, up from $42,375; and $28,750 for married individuals filing separately and for singles, up from $28,250.

Other Plan Limits

  • In an employee stock ownership plan (ESOP), the dollar amount for determining the maximum account balance in the plan subject to a five-year distribution period increases from $985,000 to $1,015,000, while the dollar amount used to determine the lengthening of the five-year distribution period increases from $195,000 to $200,000.
  • For simplified employee pensions (SEPs), the minimum compensation amount remains the same at $550, while the maximum compensation limit increases from $245,000 to $250,000.
  • For SIMPLE retirement accounts, the maximum contribution limit remains at $11,500.
  • The limit used in the definition of highly compensated employee under tax code section 414(q)(1)(B) is increased from $110,000 to $115,000. This definition is incorporated in many of the nondiscrimination requirements applicable to qualified pension, profit-sharing and stock bonus plans.
  • Additional 2012 COLA increases for retirement plan benefits and contributions can be found on the IRS website here and (in tabular form) here.

Other 2012 Benefit Changes

For 2012 adjustments affecting Social Security benefits, see the SHRM Online article "Social Security Benefits to Increase 3.6% for 2012; Higher Max on Taxable Earnings."

For 2012 adjustments affecting health savings accounts (HSAs) and high-deductible health plans, see the SHRM Online article "For 2012, Higher Limits for HSA Contributions, Out-of-Pocket Expenses for High Deductible Plans."

Stephen Miller, CEBS, is an online editor/manager for SHRM.

Related Article—External:

What’s the Impact of 2012 IRS Retirement Plan Limits?, Van Iwaarden Associates, October 2011

Quick Links:

Sign up for SHRM’s free Compensation & Benefits e-newsletter


Job Finder

Find an HR Job Near You
Post a Job

Apply by October 19

Get recognized as an HR expert. Earn your SHRM-CP and SHRM-SCP certification, and set yourself apart.

Apply Now


Find the Right Vendor for Your HR Needs

SHRM’s HR Vendor Directory contains over 10,000 companies

Search & Connect