IRS Announces Cost-of-Living Adjustments for 2009

October 20, 2008

The Internal Revenue Service has announced a number of cost-of-living adjustments effective in 2009 to dollar limitations under retirement plans, along with 2009 adjustments to other benefits-related limits.

2009 Retirement Plan Cost-of-Living Adjustments

  • Includable Compensation. The annual limit on the amount of a participant’s total compensation that can be taken into account under a qualified plan or a Section 403(b) annuity contract will increase from $230,000 to $245,000.
  • Defined Contribution Annual Addition Limit. The dollar limit on aggregate annual additions (including contributions and forfeiture allocations) under an employer’s defined contribution plans will increase from $46,000 to $49,000.
  • Defined Benefit Maximum. The annual benefit limit under an employer’s defined benefit plans will increase from $185,000 to $195,000.
  • Definition of Key Employee. The dollar limit on compensation for determining whether an officer should be classified as a “key employee” under a top-heavy plan will increase from $150,000 to $160,000. Thus, an officer employee earning more than $160,000 in 2009 will be treated as a key employee that year.
  • Highly Compensated Employees. The dollar limit on compensation that is used to determine whether an individual should be classified as a “highly compensated employee” (“HCE”) will increase from $105,000 to $110,000 for 2009. Thus, under the “look-back” rule, an individual earning more than $110,000 in 2009 will be treated as an HCE for 2010. For the year 2009, an individual will be treated as an HCE if his or her compensation for 2008 exceeded $105,000. Please note that if the employer elects to apply the “top-20%” rule for determining HCEs, some individuals with compensation above these limits may not be considered HCEs.
  • Compensation Limit for Governmental Plans. The annual compensation limit for certain grandfathered governmental plans will increase from $345,000 to $360,000.
  • ESOPs. The dollar amount for determining the maximum account balance in an ESOP subject to a five-year distribution period will increase from $935,000 to $985,000, while the amount used to determine the lengthening of the five-year distribution period will increase from $185,000 to $195,000.
  • SEPs and SIMPLE Retirement Plans. The minimum compensation that will require a simplified employee pension (“SEP”) contribution will increase from $500 to $550, and the annual limit for salary reductions under a SIMPLE retirement plan will increase from $10,500 to $11,500.
  • Elective Deferral Contributions. The annual limit on elective deferrals to Section 401(k) plans, Section 403(b) annuity contracts and eligible Section 457 plans will increase from $15,500 to $16,500.
  • Age 50 and Older Catch-Up Contributions. The annual limit for catch-up contributions for individuals age 50 or over under Section 401(k) plans, Section 403(b) annuity contracts and eligible Section 457 plans sponsored by governmental entities will increase from $5,000 to $5,500. For SIMPLE 401(k) or IRA accounts, the annual limit will remain unchanged at $2,500.

Other 2009 Benefits-Related Limits

  • Health Savings Accounts (“HSAs”). The annual deduction limit for contributions to an HSA for an individual with self-only coverage under a high deductible health plan ("HDHP") will be $3,000; for an individual with family coverage under an HDHP, the limit will be $5,950. An HDHP will have to have an annual deductible that is not less than $1,150 for self-only coverage or $2,300 for family coverage. In addition, the annual out-of-pocket expenses (deductibles, co-payments and other amounts, but not premiums) may not exceed $5,800 for self-only coverage or $11,600 for family coverage. Individuals age 55 and older who are covered by an HDHP can make additional “catch-up” contributions each year until they enroll in Medicare. By statute, the catch-up contribution limit for 2009 and subsequent years will be $1,000.
  • Transportation Fringe Benefits. The limits on exclusions from gross income allowed for employer-provided qualified transportation fringe benefits have been increased to account for inflation. Up to $120 per month will be excludable for the cost of transportation in a highway commuter vehicle if such transportation is connected with travel between the employee’s residence and place of employment. The limit on income exclusion for any transit pass will be increased to $120 per month. The limit for qualified parking will be $230 per month.
  • Long-Term Care Insurance Premiums. Long-term care insurance premiums qualify as deductible “medical care” costs up to certain limits for a taxable year. The applicable inflation-adjusted limits will be as follows:

Age Attained Before End of Taxable Year Limit
40 or less $320
More than 40 but not more than 50 $600
More than 50 but not more than 60  $1,190
More than 60 but not more than 70 $3,180
More than 70 $3,980

2009 Social Security Wage Base

In addition to the above cost-of-living adjustments, the Social Security Administration has announced an increase in the Social Security wage base. The maximum compensation for determining the Social Security wage base will increase from $102,000 to $106,800 in 2009.

For additional information related to these changes or any other questions regarding plan qualification, please contact any member of the McGuireWoods Employee Benefits team.

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