Noting that the 2006 plan limits include a large number
of changes, the IRS said in
a Web statement
that the increase in the cost-of-living index met the
statutory thresholds that trigger their adjustment for most
of the dollar limit categories. In several other cases, the
limit changes were driven by provisions in recent laws
including the Economic Growth and Tax Relief Reconciliation
Act of 2001 (EGTRRA), officials said.
According to the IRS, the 2006 revisions include:
- the limitation on the annual benefit under a defined benefit plan under section 415(b)(1)(A) is increased from $170,000 to $175,000 . For participants who separated from service before January. 1, 2006, the limitation for defined benefit plans under section 415(b)(1)(B) is computed by multiplying the participant’s compensation limitation, as adjusted through 2005, by 1.0383.
- The limitation for defined contribution plans under section 415(c)(1)(A) will go from $42,000 to $44,000 .
- The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) is increased from $210,000 to $220,000 .
- The dollar limitation under Section 416(i)(1)(A)(i) concerning the definition of key employee in a top-heavy plan is increased from $135,000 to $140,000 .
- 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 five-year distribution period is increased from $850,000 to $885,000 , while the dollar amount used to determine the lengthening of the five-year distribution period is increased from $170,000 to $175,000 .
- The limit used in the definition of highly compensated employee under Section 414(q)(1)(B) is increased from $95,000 to $100,000 .
- 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, is increased from $315,000 to $325,000 .
- The compensation amount under Section 408(k)(2)(C) regarding simplified employee pensions (SEPs) remains unchanged at $450 .
- 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 $85,000 . The compensation amount under Section 1.61 21(f)(5)(iii) is increased from $170,000 to $175,000 .
- The limitation under Section 408(p)(2)(E) regarding SIMPLE retirement accounts remains unchanged at $10,000 .
Meanwhile, the IRS said that limits changed by EGTRRA include:
- The dollar limit 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 408 (p) for individuals aged 50 or over is increased from $4,000 to $5,000 . 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 408 (p) for individuals aged 50 or over is increased from $2,000 to $2,500 .
- The limit under Section 402(g)(1) on the exclusion for elective deferrals described in Section 402(g)(3) is increased from $14,000 to $15,000 .
- The ceiling on deferrals under Section 457(e)(15) concerning deferred compensation plans of state and local governments and tax-exempt organizations is increased from $14,000 to $15,000 .
Administrators of defined benefit or defined contribution plans that have received favorable determination letters should not request new determination letters solely because of yearly amendments to adjust maximum limitations in the plans, tax agency officials said in Friday’s announcement.
The tax agency said Section 415 of the Internal Revenue Code mandates that the IRS annually adjust dollar limits on benefits and contributions under qualified retirement plans to reflect cost of living hikes.
For a table detailing these changes, go here .
Separately, the Social Security Administration (SSA) announced that the maximum amount of earnings subject to the Social Security tax (taxable maximum) will increase to $94,200 from $90,000 next year. Of the estimated 161 million workers who will pay Social Security taxes in 2006, about 11.3 million will pay higher taxes as a result of the increase in the taxable maximum in 2006, according to the SSA.