It’s hard to believe we’re in 2012 already! With the New Year, there are new retirement plan limits you should know about.
Deferrals (401(k) salary deferrals) and catch-up deferral contributions are always limited on a calendar year basis. For 2012, the deferral limit has increased from $16,500 to $17,000, while the catch-up deferral contribution limit remains unchanged at $5,500. A participant may make catch-up deferral contributions only if he or she will have reached their 50th birthday by the end of the year. And, as always, a participant cannot defer more than 100% of his or her compensation. Remember, the deferral limit is a personal limit, so if your 401(k) plan has immediate entry, and you have a new participant who defers close to the limit, you may need to discuss the deferral limit with the participant so that the total amount deferred by that participant (to all plans) does not exceed the deferral limit ($17,000 if under age 50, $22,500 if age 50 or older).
For plan years that begin in 2012, the compensation that may be used to calculate benefits, contributions, and deduction limits is limited to $250,000. This is an increase from $245,000 for the prior year. You should check your plan document to make sure you are including the correct items in plan compensation.
For defined contribution plans, the amount that a participant may have contributed to his or her account is the “Annual Additions Limit”. This total includes allocations of contributions, deferrals (but not catch-up deferral contributions), and forfeitures. For the plan year ending in 2012, the Annual Additions limit is $50,000; this is an increase of $1,000. Again, as with the deferral limit, a participant’s “annual additions” cannot exceed 100% of compensation.
If you have a participant in your plan with fairly low compensation, who defers close to 100% of compensation, that participant may have to have deferrals returned to him or her if you make an employer contribution. Most plan documents require participant deferrals to be returned first if the annual additions limit is exceeded.
In defined benefit plans, the annual benefit, rather than the annual contribution, is limited. For a participant with at least 10 years of participation and a normal retirement age of 62 through 65, the maximum annual benefit has increased from $195,000 to $200,000 for plan years ending in 2012. If the participant has less than 10 years of participation, the limit is prorated. For participants with a retirement age less than 62, the $200,000 is actuarially reduced. For participants with a retirement age greater than 65, the $200,000 is actuarially increased. Again, as always, the benefit cannot exceed 100% of the highest three consecutive plan year average compensation, prorated for years of service less than 10.