The IRS Notice 2017-64 just announced the 2018 retirement plan benefit limits, and there are many changes since 2017. What does it all mean for employer-sponsored retirement plans? Below is a table summarizing the primary benefit limits, followed by our analysis of the practical effects for both defined contribution (DC) and defined benefit (DB) plans.
|Qualified Plan Limit||2016||2017||2018|
|415 maximum DC plan annual addition||$53,000||$54,000||$55,000|
|Maximum 401(k) annual deferral||$18,000||$18,000||$18,500|
|Maximum 50+ catch-up contribution||$6,000||$6,000||$6,000|
|415 maximum DB “dollar” limit||$210,000||$215,000||$220,000|
|Highly compensated employee (HCE) threshold||$120,000||$120,000||$120,000|
|401(a)(17) compensation limit||$265,000||$270,000||$275,000|
|Social Security Taxable Wage Base||$118,500||$127,200||$128,700|
Changes affecting both DB and DC plans
- Qualified compensation limit increases to $275,000. Highly-paid participants will now have more of their compensation “counted” towards qualified plan benefits and less towards non-qualified plans. This could also help plans’ nondiscrimination testing if the ratio of benefits to compensation decreases.
- HCE compensation threshold remains at $120,000. This is the fourth year in a row that the HCE compensation limit has been stuck at $120,000. When this threshold doesn’t increase to keep pace with employee salary increases, employers may find that more of their employees become classified as HCEs. This could have two direct outcomes:
- Plans may see marginally worse nondiscrimination testing results (including ADP results) if more employees with large deferrals or benefits become HCEs. It could make a big difference for plans that were previously close to failing the tests.
- More HCEs means that there are more participants who must receive 401(k) deferral refunds if the plan fails the ADP test.
Note that there is a “lookback” procedure when determining HCE status. This means that the 2019 HCEs are determined based on whether their 2018 compensation is above the $120,000 threshold.
DC-specific increases and their significance
- The annual DC 415 limit increases from $54,000 to $55,000 and the 401(k) deferral increases to $18,500. Savers will be glad to have more 401(k) deferral opportunity, albeit a modest $500 increase. Even though these deferrals count towards the total DC limit, employers can also increase their maximum profit sharing allocations. Individuals could potentially get up to $36,500 from employer matching and profit sharing contributions ($55K – $18.5K) if they maximize their DC plan deductions.
- 401(k) “catch-up” limit remains at $6,000. Participants age 50 or older still get a $6,000 catch-up opportunity in the 401(k) plan, which means they can effectively get a maximum DC deduction of $61,000 ($55K + $6K).
DB-specific increases and their significance
- DB 415 maximum benefit limit (the “dollar” limit) increases to $220,000. This is the second straight year we’ve seen an increase in the DB 415 limit, after three years of static amounts. The primary impact is that individuals who have very large DB benefits (say, shareholders in a professional firm cash balance plan) could see a deduction increase if their benefits were previously constrained by the 415 dollar limit.
- Social Security Taxable Wage Base increases to $128,700. This is a modest $1,500 increase from the prior limit. With regards to qualified retirement benefits, a higher wage base can slightly reduce the rate of pension accruals for highly-paid participants in integrated pension plans that provide higher accrual rates above the wage base.