Plan Administration & Design, Inc.
Pension Consultants, Actuaries & Administrators
ANNOUNCEMENT: 2017 RETIREMENT PLAN LIMITS
The IRS recently announced the cost-of-living adjustments applicable to certain limitations for retirement plans in 2017.
The 2017 calendar year limits are as follows:
- 401(k) Deferrals (1,2) $18,000
- 401(k) Catch-Up Contributions (1,2) $6,000
- Defined Contribution Limit $54,000
- Defined Benefit Dollar Limit $215,000
- Compensation Limitation $270,000
- Highly Compensated Employee (3) $120,000
- Key Employee Officer $175,000
- Social Security Taxable Wage Base $127,200
(1) There is no change in the limits from 2016.
(2) An employee who is at least age 50 in 2017 may elect to defer $24,000 (the $18,000 basic limit plus the $6,000 catch-up amount).
(3) An employee with gross wages over $120,000 in the 2017 plan year will be treated as highly compensated in the next plan year – 2018.
Dissinger Associates Plan Administration & Design, Inc. is an employee owned firm of retirement plan consultants, administrators and actuaries. We specialize in the design, installation and administration of tax qualified retirement plans. Our experienced staff is dedicated to providing high quality service. 2017 will be our 36th year servicing the business community.
- 11835 West Olympic Blvd ● Suite 1000E● Los Angeles, CA 90064-5828 ● (323) 655-5400 ● Fax (323) 655-4100
- Alternate Fax: (424) 465-9773
The safe harbor 401(k) Plan is ideal for a client who wants to avoid the burden of the discrimination test and the possibility of corrective distributions to the client’s highly compensated employees due to poor participant by the other (non-highly compensated employees).
In order to be exempt from the discrimination test, the Plan must provide for either of the following two (2) employer contributions.
(1) An employer contribution of 3% of compensation made on behalf of each non-highly compensated participant. The contribution is required to be 100% vested immediately – there is no requirement that the participant makes an elective contribution to receive this employer contribution.
(2) A matching contribution of 100% of the first 3% of compensation deferred and 50% of the next 2 % of compensation deferred. So, a participant deferring 5% of compensation, will receive an employer matching contribution of 4% of compensation which is 100% vested immediately.
This type of Plan is ideal in the small closely-held business, where both the owner and spouse are on payroll, and the other employees do not defer in a robust manner. The owner and spouse can defer the full limit for the tax year ($18,000 in 2017), and the catch-up amount ($6,000 in 2017), with a small contribution as stated above for the other employees.
A Section 401(k) Plan is kind of deferred compensation plan in which an employee can elect to have the employer contribute a portion of his or her wages to the plan on a pre–tax basis. These deferred wages are not subject to income tax withholding at the time of deferral, and they are not reflected on your Form 1040 since they were not included in the taxable wages on your Form W-2. However, they are included as wages subject to social security, Medicare, and federal unemployment taxes.
The amount that an employee may elect to defer to a 401(k) plan is limited. During 2017, an employee generally cannot elect to defer more than $18,000 for all 401(k) plans in which the employee participates, and in addition, participants age 50 or older are eligible to make an additional “catch-up contribution” of $6,000. These are statutory limits that are subject to cost-of-living adjustments each calendar year. These deferral limits however are subject to further restriction based on the annual operation of the Plan as explained below.
Realizing 401(k) Plan tax benefits requires that these Plans provide substantive benefits for rank-and-file employees, not just the highly compensated employees of the sponsoring employer. These requirements are referred to as nondiscrimination rules and cover the level of plan benefits (elective deferrals) for rank-and-file employees compared to the highly compensated employees. A Section 401(k) Plan is subject to annual testing to assure that the amount of contributions made on behalf of the rank-and-file employees is proportional to contributions made on behalf of the highly compensated employees.
If the highly compensated employees for a year defer at rates higher than what is deemed proportional to the rank-and-file overall rate, then in order to satisfy the nondiscrimination rules, a corrective distribution is made to each affected highly compensated employee.
To encourage participation among the rank-and-file employees, some employers offer to match employees’ deferrals. However, matching contributions on the part of the employer is not a guarantee that the Plan will satisfy the annual testing each year, but may serve as an incentive to increase the participation rates of the rank-and-file employees.
The amount of corrective distribution is taxable in the year of receipt. For example, correction for the 2016 testing will occur in 2017 and will be taxable in 2017.
In conclusion, satisfying the nondiscrimination test is dependent on the willingness of the rank-and-file employees to elect to defer a portion of their wages. Raising the awareness of the tax deferral benefits among the rank-and-file employees can yield higher participation rates, and thereby may allow the highly compensated employees to defer without correction.
See the article on Safe Harbor 401(k) Plans for an explanation of the method to guarantee that all elective contributions remain tax deferred until distributed.
Q. How was the Roth 401(k) plan created?
A. Roth 401(k) contributions were introduced by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). The Act allows, but doesn’t require, an employer to add a Roth contribution option to its 401(k) Plan starting January 1, 2006.
Q. How is the Roth 401(k) different from a traditional 401(k)?
A. The basic difference between a Roth 401(k) and a traditional 401(k) is that the Roth version is funded with after-tax contributions while the traditional 401(k) is funded with pre-tax contributions. In other words, with a Roth 401(k) you pay taxes on the contributions but qualified distributions* are not subject to federal income tax. A traditional 401(k) saves you taxes today, but distributions are taxed.
* A distribution is qualified if the account is at least five years old, and the participant is at least age 59 1/2 or disabled or the distribution is on account of the participant’s death.
Q. Who is eligible to participate in a Roth 401(k)?
A. Anyone who meets plan eligibility requirements can elect to make Roth contributions.
Q. Can participants contribute to both a Roth 401(k) and a traditional 401(k)?
A. Yes, individuals may maintain both types of accounts. The annual elective deferral limit ($18,000 in 2017) will apply to the total of traditional 401(k) and Roth contributions. In other words, you can’t save $18,000 in a traditional 401(k) and an additional $18,000 in a Roth 401(k). Participants need to understand that the Roth 401(k) is not an additional opportunity to save. It is simply an alternative savings opportunity with a different kind of tax treatment.
Q. Can participants get a company match?
A. Yes, participants can receive an employer match on their Roth contributions. Employer matching contributions are made on a pre-tax basis. This requires participants to have both a Roth 401(k) account (for their personal contributions) and a traditional pre-tax account (for the employer matching contributions). The employer matching funds will grow on a tax-deferred basis and will be taxed as ordinary income at the time of withdrawal.
Q. Can Roth 401(k) accounts be rolled over?
A. At retirement or employment termination, Roth 401(k) funds can be rolled into a Roth IRA or another Roth 401(k). They cannot be rolled into a traditional 401(k) or IRA.
Q. Can loans be taken from a Roth 401(k) account?
A. Yes, subject to a few IRS rules.
Q. What has been the initial interest by companies in offering a Roth 401(k)?
A. How popular the Roth 401(k) will be is unclear. Many plan sponsors have indicated that they will be more likely to start offering a Roth 401(k) if their employees strongly indicate they intend to participate. Many industry analysts expect interest in the Roth contribution type from companies whose employees are in higher-income brackets, such as financial services, healthcare and professional services industries.
Some companies haven’t focused on making it available because they will need additional payroll accounting and systems ability to track Roth 401(k)s, potentially a significant expense. They will also need to develop educational campaigns to bring employees up to speed. That said, some companies will likely feel compelled to offer a Roth 401(k) to keep their benefits competitive.
Q. What are some of the major administrative and recordkeeping challenges associated with implementing a Roth 401(k) program?
A. 1. Adding a Roth after-tax contribution will add some complexity to the payroll and deferral-transmittal process. Payroll vendors and staff members involved in the payroll process will need to change their existing practices and systems in order to track and submit a new type of contribution, as well as accommodate different tax status of participant accounts.
2. 401(k) plan recordkeepers have enhanced their systems to track Roth contributions and earnings separately and differently from regular 401(k) deferrals. Distributions will also become more complex as participants may have two deferral sources from which to take a loan or distribution.
3. The Roth provisions will need to be reflected in the plan document and explained in the Summary Plan Description. This will require a plan amendment for any plan electing to offer the Roth 401(k).
Q. What are the withdrawal rules?
A. Roth 401(k)s are similar to Roth IRAs in this regard: an investor must hold the account for five years before a tax-free withdrawal. In other respects, a Roth 401(k) will be similar to a traditional 401(k); withdrawal before age 59½ may be available, but a 10% penalty will apply to the taxable amount. Roth 401(k) assets are available for withdrawal under the same circumstances as traditional 401(k) assets.
There are a number of outstanding related issues which we expect the IRS to clarify. There are questions about required minimum distributions (RMDs), loans, hardship withdrawals, corrective distributions resulting from failed non-discrimination tests and cash-out distributions.
Q. Will Roth 401(k) contributions be included in ADP (Average Deferral Percentage) testing?
A. Roth contributions are included in the ADP tests. A return of excess contributions due to a failed ADP test will be allowed.
The IRS has announced the cost of living adjustments applicable to certain limitations for retirement plans in 2009. In addition, certain other limitations are specified by the Economic Growth and Tax Relief Act of 2001 (EGTRRA).
The 2009 limits are as follows:
- 401(k) Deferrals $16,500
- 401(k) Catch-Up Contributions (1) $ 5,500
- Defined Contribution Additions $ 49,000
- Compensation Limitation $ 245,000
- Highly Compensated Employee (2) $ 110,000
- Social Security Taxable Wage Base $ 106,800
(1) An employee who is at least age 50 in 2009 may elect to defer $22,000 (the $16,500 basic limit plus the $5,500 catch-up amount).
(2) An employee with gross wages over $110,000 in the 2009 plan year will be treated as highly compensated in the next plan year – 2010.