The IRS just announced the 2016 retirement plan benefit limits, and there are virtually no changes from 2015. 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||2015||2016|
|415 maximum DC plan annual addition||$53,000||$53,000|
|Maximum 401(k) annual deferral||$18,000||$18,000|
|Maximum 50+ catch-up contribution||$6,000||$6,000|
|415 maximum DB “dollar” limit||$210,000||$210,000|
|Highly compensated employee (HCE) threshold||$120,000||$120,000|
|401(a)(17) compensation limit||$265,000||$265,000|
|Social Security Taxable Wage Base||$118,500||$118,500|
Changes affecting both DB and DC plans
- Qualified compensation limit remains at $265,000. A flat qualified compensation limit could have several consequences. These include:
- More compensation counted towards SERP excess benefits if a participant’s total compensation (above the threshold) increases in 2016.
- Lower-than-expected qualified pension plan accruals for participants whose pay is capped at the 401(a)(17) limit and were hoping for an increase.
- HCE compensation threshold remains at $120,000. For calendar year plans, this will first affect 2017 HCE designations because $120,000 will be the threshold for the 2016 “lookback” year. When the HCE compensation 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.
DC-specific increases and their significance
- The annual DC 415 limit remains at $53,000 and the 401(k) deferral limit remains at $18,000. Although neither of these limits has increased to allow higher contributions, it should make administering the plan a little easier in 2016 since there are no adjustments to communicate or deal with. Since the 401(k) deferral limit counts towards the total DC limit, this means that an individual could potentially get up to $35,000 from profit sharing ($53K – $18K) 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 $59,000 ($53K + $6K).
DB-specific increases and their significance
- DB 415 maximum benefit limit (the “dollar” limit) remains at $210,000. This limit remained unchanged for a third straight year, which may constrain individuals with very large DB benefits (e.g., shareholders in a professional firm cash balance plan) who were looking forward to increasing their DB plan contributions/deductions.
- Social Security Taxable Wage Base remains at $118,500. When this limit increases, it can have the effect of reducing benefit accruals for highly-paid participants in integrated pension plans that provide higher accrual rates above the wage base. When the wage based remains unchanged (like this year), it means that these individuals’ accruals may be higher-than-expected if their total compensation (above the wage base) continues to increase.