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Pension Plan – 2010 Limits
WASHINGTON — The Internal Revenue Service [yesterday] announced cost‑of‑living adjustments applicable to dollar limitations for pension plans and other items for Tax Year 2010.
Section 415 of the Internal Revenue Code provides for dollar limitations on benefits and contributions under qualified retirement plans. Section 415(d) requires that the Commissioner annually adjust these limits for cost‑of‑living increases. Other limitations applicable to deferred compensation plans are also affected by these adjustments under Section 415. Under Section 415(d), the adjustments are to be made pursuant to adjustment procedures which are similar to those used to adjust benefit amounts under Section 215(i)(2)(A) of the Social Security Act.
The limitations that are adjusted by reference to Section 415(d) will remain unchanged for 2010. This is because the cost-of-living index for the quarter ended September 30, 2009, is less than the cost-of-living index for the quarter ended September 30, 2008, and, following the procedures under the Social Security Act for adjusting benefit amounts, any decline in the applicable index cannot result in a reduced limitation. For example, the limitation under Section 402(g)(1) on the exclusion for elective deferrals described in Section 402(g)(3) will be $16,500 for 2010, which is the same amount as for 2009. This limitation affects elective deferrals to Section 401(k) plans and to the Federal Government’s Thrift Savings Plan, among other plans.
Effective January 1, 2010, the limitation on the annual benefit under a defined benefit plan under Section 415(b)(1)(A) remains unchanged at $195,000. For participants who separated from service before January 1, 2010, the limitation for defined benefit plans under Section 415(b)(1)(B) is computed by multiplying the participant’s compensation limitation, as adjusted through 2009, by 1.0000.
The limitation for defined contribution plans under Section 415(c)(1)(A) remains unchanged for 2010 at $49,000.
The Code provides that various other dollar amounts are to be adjusted at the same time and in the same manner as the dollar limitation of Section 415(b)(1)(A). After taking into account the applicable rounding rules, the amounts for 2010 are as follows:
The limitation under Section 402(g)(1) on the exclusion for elective deferrals described in Section 402(g)(3) remains unchanged at $16,500.
The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) remains unchanged at $245,000.
The dollar limitation under Section 416(i)(1)(A)(i) concerning the definition of key employee in a top-heavy plan remains unchanged at $160,000.
The dollar amount under Section 409(o)(1)(C)(ii) for determining the maximum account balance in an employee stock ownership plan subject to a 5‑year distribution period remains unchanged at $985,000, while the dollar amount used to determine the lengthening of the 5‑year distribution period remains unchanged at $195,000.
The limitation used in the definition of highly compensated employee under Section 414(q)(1)(B) remains unchanged at $110,000.
The dollar limitation under Section 414(v)(2)(B)(i) for catch-up contributions to an applicable employer plan other than a plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over remains unchanged at $5,500. The dollar limitation under Section 414(v)(2)(B)(ii) for catch-up contributions to an applicable employer plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over remains unchanged at $2,500.
The annual compensation limitation under Section 401(a)(17) 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 Section 401(a)(17) to be taken into account, remains unchanged at $360,000.
The compensation amount under Section 408(k)(2)(C) regarding simplified employee pensions (SEPs) remains unchanged at $550.
The limitation under Section 408(p)(2)(E) regarding SIMPLE retirement accounts remains unchanged at $11,500.
The limitation on deferrals under Section 457(e)(15) concerning deferred compensation plans of state and local governments and tax-exempt organizations remains unchanged at $16,500.
The compensation amounts under Section 1.61‑21(f)(5)(i) of the Income Tax Regulations concerning the definition of “control employee” for fringe benefit valuation purposes remains unchanged at $95,000. The compensation amount under Section 1.61‑21(f)(5)(iii) remains unchanged at $195,000.
The Code also provides that several pension-related amounts are to be adjusted using the cost-of-living adjustment under Section 1(f)(3). After taking the applicable rounding rules into account, the amounts for 2010 are as follows:
The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for married taxpayers filing a joint return is increased from $33,000 to $33,500; the limitation under Section 25B(b)(1)(B) remains unchanged at $36,000; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D), remains unchanged at $55,500.
The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for taxpayers filing as head of household is increased from $24,750 to $25,125; the limitation under Section 25B(b)(1)(B) remains unchanged at $27,000; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D), remains unchanged at $41,625.
The adjusted gross income limitation under Section 25B(b)(1)(A) for determining the retirement savings contribution credit for all other taxpayers is increased from $16,500 to $16,750; the limitation under Section 25B(b)(1)(B) remains unchanged at $18,000; and the limitation under Sections 25B(b)(1)(C) and 25B(b)(1)(D), remains unchanged at $27,750.
The deductible amount under § 219(b)(5)(A) for an individual making qualified retirement contributions remains unchanged at $5,000.
The applicable dollar amount under Section 219(g)(3)(B)(i) for determining the deductible amount of an IRA contribution for taxpayers who are active participants filing a joint return or as a qualifying widow(er) remains unchanged at $89,000. The applicable dollar amount under Section 219(g)(3)(B)(ii) for all other taxpayers (other than married taxpayers filing separate returns) is increased from $55,000 to $56,000. The applicable dollar amount under Section 219(g)(7)(A) for a taxpayer who is not an active participant but whose spouse is an active participant is increased from $166,000 to $167,000.
The adjusted gross income limitation under Section 408A(c)(3)(C)(ii)(I) for determining the maximum Roth IRA contribution for married taxpayers filing a joint return or for taxpayers filing as a qualifying widow(er) is increased from $166,000 to $167,000. The adjusted gross income limitation under Section 408A(c)(3)(C)(ii)(II) for all other taxpayers (other than married taxpayers filing separate returns) remains unchanged at $105,000.
Retirement and Savings Initiatives
The following Employee Plan News is published as part of the e-news for tax professionals.
On September 5, 2009, as part of the Retirement & Savings Initiatives, the IRS and Treasury issued four notices and three revenue rulings to promote retirement plan savings. The notices provide sample amendments to add an automatic enrollment feature (also known as an automatic contribution arrangement) to 401(k) and SIMPLE IRA plans, guidance on using an automatic contribution arrangement (ACA) in SIMPLE IRA plans and two updated safe harbor explanations (§402(f) notices) for eligible rollover distributions (ERDs). The revenue rulings clarify the rules on increasing ACA default contribution percentages and on contributing unused vacation and sick pay to a retirement plan, both annually and upon termination of employment.
The Treasury Department also issued the following statement:
Statement of Treasury Secretary Tim Geithner on the Administration’s New Retirement Security Initiatives “Today, the Administration announced steps we are taking to make it easier for working families to save, particularly for retirement. Working Americans should be able to retire with dignity and security, but nearly half of the nation’s workforce has little or nothing beyond Social Security benefits to get by on in old age. The measures we are announcing today will give more choices to families who want to save, and will complement the Administration’s legislative proposals to expand retirement savings. Just as the Administration is dedicated to reviving the economy and getting people back to work, so too it is dedicated to helping put retirement security within the reach of all Americans.”
Additionally, the IRS issued the following related technical guidance.
Revenue Ruling 2009-30 provides guidance on how automatic enrollment in a § 401(k) plan can work when there is an escalator feature included. An escalator feature means that the amount of an employee’s compensation that is contributed to the plan, without the employee’s affirmative election, is increased periodically according to the terms of the plan. Two situations are described, one involves a basic automatic contribution arrangement and the other involves an eligible automatic contribution arrangement described in § 414(w) of the Code. Revenue Ruling 2009-30 is part of the “Savings Initiative” guidance issued by the Service.
Revenue Ruling 2009-31 provides guidance on the tax consequences of an amendment to a tax-qualified retirement plan to permit annual contributions of an employee’s unused paid time off under the employer’s paid time off plan. A paid time off plan generally refers to a sick and vacation arrangement that provides for paid leave whether the leave is due to illness or incapacity. The amendment relates to a contribution (including a section 401(k) contribution) or cash out of the unused paid time off, determined as of the end of the plan year (December 31). Rev. Rul. 2009-31 is companion guidance to Rev. Rul. 2009-32 and is part of the “Savings Initiative” guidance issued by the Service.
Revenue Ruling 2009-32 provides guidance on the tax consequences of an amendment to a tax-qualified retirement plan to permit contributions for an employee’s accumulated and unused paid time off under the employer’s paid time off plan at a participant’s termination of employment. A paid time off plan generally refers to a sick and vacation arrangement that provides for paid leave whether the leave is due to illness or incapacity. The amendment relates to a post-severance contribution (including a section 401(k) contribution) or cash out of the accumulated and unused paid time off. Rev. Rul. 2009-32 is companion guidance to Rev. Rul. 2009-31 and is part of the “Savings Initiative” guidance issued by the Service.
Notice 2009-65 provides two sample amendments that sponsors of § 401(k) plans can use to add automatic enrollment features to their plans. The first sample amendment can be used to add a basic automatic contribution arrangement with, if elected by an adopting employer, an escalation feature. The second sample amendment can be used to add an eligible automatic contribution arrangement (“EACA”) as described in § 414(w) of the Code with, if elected by an adopting employer, an escalation feature. Final regulations under § 414(w) were published in the Federal Register on February 24, 2009 (74 F.R. 8200). Notice 2009-65, by providing sample amendments, facilitates the use of EACAs in § 401(k) plans. Notice 2009-65 is part of the “Savings Initiative” guidance issued by the Service.
Notice 2009-66 provides guidance to facilitate automatic enrollment in SIMPLE IRA plans, including questions and answers relating to the inclusion in a SIMPLE IRA plan of an automatic contribution arrangement. This notice also requests comments on whether the Department of the Treasury and the Service should issue guidance regarding SIMPLE IRA plans that include eligible automatic contribution arrangements under § 414(w).
Notice 2009-67 provides a sample amendment that can be used by a sponsor of a SIMPLE IRA Plan described in § 408(p) of the Code to add an automatic contribution arrangement to the plan. Only SIMPLE IRA plans that use a designated financial institution described in § 408(p)(7) can use the sample amendment. Notice 2009-67 is companion guidance to Notice 2009-66 and is part of the “Savings Initiative” guidance issued by the Service.
Notice 2009-68 contains two safe harbor explanations that may be provided to recipients of eligible rollover distributions from an employer plan in order to satisfy § 402(f) of the Code. The first safe harbor explanation applies to a distribution not from a designated Roth account, as described in § 402A. The second safe harbor explanation applies to a distribution from a designated Roth account. These safe harbor explanations update the safe harbor explanations that were published in Notice 2002-3, 2002-1 C.B. 289, to reflect changes in the law. Notice 2009-68 is part of the “Savings Initiative” guidance issued by the Service.
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