Previously-Set 2018 COLA Limits For 401(k)/Other Retirement Plans Remain Same Under Tax Cuts And Jobs Act


The IRS has announced that retirement plan dollar limitations for 2018 that were previously announced last October in IR-2017-177 and Notice 2017-64 will not change despite the new inflation-adjustment protocol required under the Tax Cut and Jobs Act of 2017. Rounding as specified under the tax code using the new chained CPI method turns out to produce the same results as previously announced for 2018 pension plan and qualified retirement plan limitations, as well as contribution limits and income thresholds for individual retirement accounts (IRA) and the Saver’s Credit.

Take away. Year-over-year changes for inflation adjusted-amount generally tend to change more frequently for larger dollar amounts, whether upon prior-law’s all-urban CPI method or the slightly lower chained-CPI amounts now required under the Tax Cuts and Jobs Act. Under the prior-law adjustments for 2018, many inflation-sensitive retirement plan contribution benefit limits had already been calculated to rise, after remaining flat for several years. An additional rise simply for the difference small between the old and new inflation-adjusted amounts was insufficient to bump up those amounts beyond levels already rounded.

Background

Code Sec. 415 provides both dollar limitations on benefits and contributions under qualified retirement plans, along with a requirement that the IRS annually adjust these limits to reflect increases in the cost of living. 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 Code Sec. 415(b)(1)(A). Further the Code also provides that several retirement-related amounts are to be adjusted using the cost-of-living adjustment under Code Sec. 1(f)(3).

For tax years beginning after December 31, 2017 (December 31, 2018, for individual tax brackets and the standard deduction), the Tax Cuts and Jobs Act requires calculation of annual inflation adjustments will be made by using the Chained Consumer Price Index for All Urban Consumers (C-CPI-U) ( Code Sec. 1(f)(3) and (6)). The C-CPI-U is calculated in much the same way as the CPI, but rather than simply accounting for the impact of inflation on the price of goods, it also accounts for consumers’ diminished capacity to achieve the same standard of living due to the increase in the price of consumer goods.

Adjustments

The 2018 adjustments, provided by the IRS in IR-2017-177, Notice 2017-64 (see the October 26, 2017 issue of this newsletter), have been confirmed by the IRS this past week to continue to be applicable. They cover over 25 categories, including the following:

401(k)/elective deferrals. The limits on elective deferrals for employees who participate in 401(k)s, 403(b)s, certain 457s, and Thrift Savings Plans rise to $18,500 in 2018, after remaining at $18,000 for several years.

IRA contributions. Eligible individuals can contribute up to $5,500 to an Individual Retirement Account (IRA) in 2018, the same as for 2017. The allowable IRA deduction phase out at AGI levels rise against their 2017 counterparts, however, as will AGI levels for allowable Roth contributions.

Catch-up contributions. Eligible individuals age 50 and above may make catch-up contributions to IRAs, 401(k)s and other savings arrangements. The catch-up amount for 401(k)s, 457s, 403(b)s, and SEPs for 2018 remains unchanged for 2018 at $6,000. IRA catch-up remain at the flat $1,000 level specified under Code Sec. 219(b)(5)(B) as it is not subject to annual COLA.

Defined contribution plans. The limitation for Code Sec. 415(c)(1)(A) defined contribution plans have increased from $54,000 for 2017 to $55,000 for 2018.

Defined benefit plans and ESOPs. The annual benefit limit under a Code Sec. 415(b)(1)(A) defined benefit plan (the maximum amount a plan may pay a participant each year) sees an increase to $220,000 for 2018, up from $215,000 in 2017. The amount for determining the maximum ESOP account subject to a five-year distribution period increases from $1,080,000 for 2017 to $1,105,000 for 2018. The dollar amount used to determine the lengthening period of the five-year distribution has increased to $220,000 for 2018, up from the 2017 limit of $215,000.

Annual compensation limit. The annual compensation limit under Code Secs. 401(a)(17) (relating to the maximum compensation counted for an eligible employee in a qualifying plan), 404(l) (addressing the deductibility of employer contributions), 408(k)(3)(C) (nondiscrimination rules for simplified employee pensions (SEPs)) and 408(k)(6)(D)(ii) (the deferral percentage for SEPs) will rise $5,000 to $275,000 for 2018. The annual compensation limit under Code Sec. 401(a)(17) for eligible participants in certain governmental plans that allowed COLA adjustments under the plan as in effect on July 1, 1993 has also increased to $405,000 from the 2017 level of $400,000.