The IRS has provided 401(k) plan inflation adjustments for 2014 that impacts certain dollar limits that apply to 401(k) plans for 2014. An overview of this guidance is listed below.
Limits on Participant Contributions: The limits on 401(k) deferrals and catch-up contributions were not changed for 2014. A 401(k) plan participant may make 401(k) deferrals up to a maximum of $17,500 during 2014. This limit is sometimes referred to as the “elective deferral limit” or the “402(g) limit.” The law also allows participants who are or will be age 50 by the end of the 2014 to elect to make additional deferrals, referred to as “catch-up contributions,” to a 401(k) plan up to a maximum of $5,500 during 2014.
Limit on Compensation Considered When Determining Employer Contributions: Employer contributions under a 401(k) plan may not be calculated based on compensation received by a participant that is in excess of the annual compensation limit. For 2013, this annual compensation limit was $255,000; however, for 2014, the annual compensation limit will be increased to $260,000. It is important to note that most 401(k) plans allow a participant to continue making 401(k) deferrals after they have reached the annual compensation limit; however, a 401(k) plan may be written to apply the compensation limit to all contributions under the plan, including 401(k) deferrals.
Maximum Contributions to 401(k) Plan: In addition to limiting the amount of 401(k) deferrals and catch-up contributions that a participant may make under a 401(k) plan, the IRS puts a limit on the total contributions that may be made to a 401(k) plan for each participant. For 2013, the annual contribution limit was the lesser of 100% of the participant’s 2013 compensation or $51,000. For 2014, the annual contribution limit will be increased to the lesser of 100% of the participant’s 2014 compensation or $52,000.
Action To Be Taken
Before the beginning of 2014, the increased annual compensation limit and the increased annual limit on contributions that may be made to a 401(k) plan must be considered. If a 401(k) plan has automated systems to assist in monitoring annual limits under the law, these systems will need to updated to reflect the increased 2014 limits on annual compensation and annual contributions.
Compliancedashboard will continue to be updated as new guidance is released.