IRS Raises 401(k) Contribution Limit

On Thursday October 18, 2012 the Internal Revenue Service(IRS) announced that effective January 1, 2013 employees will be able to contribute an additional $500 a year into their 401(k)s, tax free.

The tax-free contribution limit for retirement plans will increase to $17,500 for 2013, up from $17,000 this year. This will be the second in a row that the IRS has increased the limit by $500 as a result of the rising inflation rate.

The catch-up contribution limit-the additional amount of tax-free money employees over 50 are allowed to contribute to their retirement plan- remains unchanged at $5,500 on top of the initial $17,500.

Limits for Defined Contribution Plans

Individual Limitation-
The limit on contributions made on behalf of an individual to a defined contribution plan will be increased from $50,000 to $51,000. Application of this limit will remain the lesser of 100% of pay or $51,000.

401(k) Deferrals-
The dollar limitation on employee deferrals in 401(k) plans is increased from $17,000 to $17,500. 401(k) limits are based on the calendar year regardless of plan year end.

Catch-Up Contributions-
Catch-up contribution for participants 50 years or older remains unchanged at $5,500. This is also a calendar year limit regardless of plan the year end.

Defined Benefit Plan Limits-

Effective January 1, 2013, the limitation on the annual benefit under a defined benefit plan under section 415(b)(1)(A) is increased from $200,0000 to $205,000.

Annual Compensation Limits-
The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) is increased from $250,000 to $255,000.

Key Employees-
The dollar limitation under Section 416(i)(1)(A)(i) concerning the definition of a key employee in a top-heavy plan remains at $165,000.

Highly Compensated Employees-
The limitation used in the definition of highly compensated employee under Section 414(q)(1)(B) remains at $115,000.

The impact of this is that employees who earn in excess of $115,000 in the plan year that begins in 2012 will be considered highly compensated for the plan year beginning in 2013 and an employee who earns in excess of $115,000 in 2013 will be considered highly compensated employees in 2014.
These limits are applicable to calendar year plans.


Fairmount Benefits Company

Two Radnor Corporate Center
Suite 110
Radnor, PA 19087

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