IRS Announces 2014 Dollar Limits and Thresholds for Benefit Plans and IRAs

The Internal Revenue Service has announced various adjustments to employee benefit plan and individual retirement account (IRA) dollar limits and thresholds for 2014, principally as a result of the increase in the applicable cost-of-living indexes. The following limits and thresholds are effective for plan years and limitation years beginning in 2014:

Retirement Plans

• Elective Deferral Contributions. The annual limit on elective deferrals (pre-tax employee contributions) to Section 401(k), 403(b) and 457(b) plans and the federal government’s Thrift Savings Plan will remain at $17,500. The annual limit for salary reductions under a SIMPLE retirement plan will remain at $12,000.
• Age 50 and Older Catch-Up Contributions. The annual limit for catch-up contributions for individuals aged 50 or over under Section 401(k) and 403(b) plans and Section 457(b) plans sponsored by governmental entities will remain unchanged at $5,500. For SIMPLE 401(k) or IRA plans, the annual limit will remain unchanged at $2,500.
• Covered Compensation. The annual limit on the amount of a participant’s total compensation that can be taken into account under a qualified plan will increase from $255,000 to $260,000.
• Compensation Limit for Governmental Plans. The annual compensation limit for certain grandfathered governmental plans is increased from $380,000 to $385,000.
• Defined Contribution Annual Addition Limit. The dollar limit on aggregate “annual additions” (including contributions and forfeiture allocations) under an employer’s qualified defined contribution plans will increase from $51,000 to $52,000.
• Defined Benefit Maximum. The annual benefit limit under an employer’s qualified defined benefit plans will increase from $205,000 to $210,000.
• Highly Compensated Employees. The dollar threshold on compensation that is used to determine whether one is to be classified as a “highly compensated employee” (HCE) will remain at $115,000. Thus, under the “look-back” rule, an individual earning more than $115,000 in 2014 will be treated as an HCE for 2015. Also under the look-back rule, an individual will be treated as an HCE for 2014 if his or her compensation for 2013 exceeded $115,000. 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.
• ESOPs. The dollar amount for determining the maximum account balance in an employee stock ownership plan subject to a five-year distribution period will increase from $1,035,000 to $1,050,000, while the amount used to determine the lengthening of the five-year distribution period will increase from $205,000 to $210,000.
• Contributions to Simplified Employee Pension Plans. The minimum compensation that will require a simplified employee pension plan contribution will remain at $550.
• Key Employees. The dollar threshold on compensation for determining whether an officer is to be classified as a “key employee” for top-heavy plan purposes is increased from $165,000 to $170,000. Thus, an officer earning more than $170,000 in 2014 will be treated as a key employee that year.

IRAs

• The deductible amount for IRAs for an individual making qualified retirement contributions will remain at $5,500.
• The deduction for taxpayers making contributions to a traditional IRA is phased out for single persons and heads of household who are covered by an employer-sponsored retirement plan and have modified adjusted gross incomes (AGI) between $60,000 and $70,000, up from $59,000 and $69,000. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by an employer-sponsored retirement plan, the phase-out range is $96,000 to $116,000, up from $95,000 to $115,000. For an IRA contributor who is not covered by an employer-sponsored retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s modified AGI is between $181,000 and $191,000, up from $178,000 and $188,000. For a married individual filing a separate return who is covered by a retirement plan, the phase-out range remains $0 to $10,000; it is not subject to a cost-of-living adjustment.
• The modified AGI phase-out range for taxpayers making contributions to a Roth IRA is $181,000 to $191,000 for married couples filing jointly, up from $178,000 to $188,000. For single persons and heads of household, the income phase-out range is $114,000 to $129,000, up from $112,000 to $127,000. For a married individual filing a separate return who is covered by a retirement plan, the phase-out range remains $0 to $10,000; it is not subject to a cost-of-living adjustment.

Other Benefits-Related Limits

• Health Savings Accounts (HSAs). The 2014 annual deduction limit for contributions to an HSA for an individual with self-only coverage under a high-deductible health plan (HDHP) will be $3,300, up from $3,250. For an individual with family coverage under an HDHP, the limit will be $6,550, up from $6,450. An HDHP will need to have an annual deductible that is not less than $1,250 for self-only coverage or $2,500 for family coverage, the same as in 2013. In addition, the annual out-of-pocket expenses (deductibles, copayments and other amounts, but not premiums) may not exceed $6,350 for self-only coverage or $12,700 for family coverage, up from $6,250 and $12,500. 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 individuals who will attain age 55 or older in the 2014 taxable year will remain at $1,000.
• Transportation Fringe Benefits. For taxable years beginning in 2014, the monthly limit for the aggregate fringe benefit exclusion amount for transportation in a commuter highway vehicle and any transit pass will be $130, a decrease from the $240 limit for 2013, and the fringe benefit exclusion amount for qualified parking will be $250, an increase from the $245 limit for 2013. The 2014 limits reflect the expiration of the modifications to Section 132(f)(2) of the Internal Revenue Code by the American Taxpayer Relief Act.
• 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 for 2014 are:

Social Security Tax Wage Base

In addition to the above adjustments, the Social Security Administration has announced an increase in the wage base for Social Security taxes from $113,700 in 2013 to $117,000 in 2014.

For additional information related to these changes or any other questions regarding plan qualification, please contact the author, Larry R. Goldstein, or any other member of the McGuireWoods employee benefits team.