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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
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 BoomersWhy 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
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."
is an online editor/manager for SHRM.
What’s the Impact of 2012 IRS Retirement Plan Limits?, Van Iwaarden Associates, October 2011
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