The Internal Revenue Service has announced the annual cost-of-living adjustments applicable to dollar limitations for pension plans and other items for Tax Year 2004. The increases that will affect the most plans are the increase in limitations on deferrals and catch-up contributions, and the increase in the maximum compensation limit.
EGTRRA Limitation Increases
The Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) amended the Internal Revenue Code (the “Code”) to specify the applicable dollar amount for certain limitations for particular years. These EGTRRA-mandated limitation increases are scheduled for the beginning of 2004:
- Limitation on Exclusion for Elective Deferrals:
- The limitation on the exclusion for elective deferrals to 401(k) plans, 403(b) annuities, simplified employee pensions (“SEPs”), and 457(b) plans is increased from $12,000 to $13,000 (Code sections 402(g)(1) and 457(e)(15)).
- The limitation on the exclusion for elective deferrals to SIMPLE retirement accounts is increased from $8,000 to $9,000 (Code section 408(p)(2)(E)).
- Dollar Limitations for Catch-Up Contributions:
- The dollar limitation for catch-up contributions for individuals aged 50 or over to 401(k) plans, 403(b) annuities, SEPs, and 457(b) plans is increased from $2,000 to $3,000 (Code section 414(v)(2)(B)(i)).
- The dollar limitation for catch-up contributions for individuals aged 50 or over to SIMPLE 401(k) Plans or SIMPLE Retirement Accounts is increased from $1,000 to $1,500 (Code section 414(v)(2)(B)(ii)).
These increases combine to allow a maximum 401(k) deferral in 2004 of $16,000 for those participants who are age 50 or older.
Other Limitation Increases
- The limitation on annual additions under defined contribution plans is increased from $40,000 to $41,000 (Code section 415(c)(1)(A)).
- The limitation on annual benefits under a defined benefit plan is increased from $160,000 to $165,000. For participants who separated from service before January 1, 2004, the defined benefit limitation is computed by multiplying the participant’s compensation limitation, as adjusted through 2003, by 1.0220 (Code sections 415(b)(1)(A) and (B)).
- The annual compensation limit is increased from $200,000 to $205,000 (Code sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii)).
- The dollar amount for determining the maximum account balance in an employee stock ownership plan subject to a 5-year distribution period is increased from $810,000 to $830,000, while the dollar amount used to determine the lengthening of the 5-year distribution period is increased from $160,000 to $165,000 (Code section 409(o)(1)(C)(ii)).
- The annual compensation limitation for eligible participants in certain governmental plans that, under the plan as in effect on July 1, 1993, allowed cost-of-living adjustments to the compensation limitation under the plan under Code section 401(a)(17) to be taken into account, is increased from $300,000 to $305,000.
- The compensation amounts used in defining “control employee” for fringe benefit valuation remains unchanged at $80,000 for Board or shareholder-appointed, confirmed, or elected officers of the employer, but is increased from $160,000 to $165,000 for all other employees (Reg. sections 1.61–21(f)(5)(i) and (iii)).
Limitations which Remain Unchanged
- The dollar limitation used for the definition of key employee in a top-heavy plan remains unchanged at $130,000 (Code section 416(i)(1)(A)(i)).
- The limitation used in the definition of highly compensated employee remains unchanged at $90,000 (Code section 414(q)(1)(B)).
- The minimum compensation amount used for determining required participation in SEPs remains unchanged at $450 (Code section 408(k)(2)(C)).