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For 2014, IRS Issues 401(k) and Pension Plan Limits
Participants’ 401(k) contribution limit unchanged; overall contribution limit rises by $1,000

By Stephen Miller, CEBS  11/1/2013

Update: The IRS will announce its 2015 adjustments for 401(k) and other retirement plans in the latter half of October 2014; SHRM Online will post the new limits and rates once they are issued, and a link to that coverage will be available here.


The Internal Revenue Service announced on Oct. 31, 2013, cost-of-living adjustments for tax year 2014, also charted here and here, that apply to dollar limits for 401(k) and other defined contribution retirement plans and for defined benefit pension plans.

Some plan limits will remain unchanged because the increase in the Consumer Price Index did not meet the statutory thresholds for their adjustment, while other limits will rise in 2014.

The announcement highlighted the following:

  • 401(k), 403(b) and profit-sharing plan elective deferrals in 2014 will remain at $17,500; the catch-up contribution limit will stay at $5,500.

  • The annual defined contribution limit from all sources will rise to $52,000 from $51,000.

  • The amount of employee compensation that can be considered in calculating contributions to defined contribution plans will increase to $260,000 from $255,000.

  • The limit used in the definition of a highly compensated employee for the purpose of 401(k) nondiscrimination testing remains unchanged at $115,000.

 

Defined Contribution Plan Limits
For 401(k), 403(b) and most 457 plans, the COLA increases for dollar limits on benefits and contributions are as follows:

2014

2013

Maximum elective deferral by employee

$17,500

$17,500

Catch-up contribution (age 50 and older during year)

$5,500

$5,500

Defined contribution maximum deferral (employer and employee combined)

$52,000

$51,000

Employee annual compensation limit for calculating contributions

$260,000

$255,000

Annual compensation of “key employees” in a top-heavy plan

$170,000

$165,000

Annual compensation of “highly compensated employee” in a top-heavy plan (“HCE threshold”)

$115,000

$115,000

 


"A $1,000 increase to the overall defined contribution limit will allow participants to potentially get a little more
'bang'
out of their plan—at least if their employer wants to give them more money," noted retirement-planning firm Van Iwaarden Associates in an online commentary on the 2014 changes.

Defined Benefit Plans

  • The maximum annual benefit that may be funded through a defined benefit plan will increase to $210,000 from $205,000.

  • For a participant who separated from service before Jan. 1, 2014,the limit for defined benefit plans is computed by multiplying the participant's compensation limit, as adjusted through 2013, by 1.0155.

"The primary consequence of this change is that individuals who have very large DB benefits (say, shareholders in a professional firm cash balance plan) could see a deduction increase if their benefits were previously constrained by the [Internal Revenue Code Section 415] dollar limit," the Van Iwaarden posting explained.

Other Workplace Retirement Plan Limits

  • For SIMPLE (savings incentive match plan for employees of small employers) retirement accounts, the maximum contribution limit will remain $12,000; the catch-up contribution limit will also stay the same, at $2,500.

  • For simplified employee pensions (SEPs), the minimum compensation amount will remain $550, while the maximum compensation limit will jump to $260,000 from $255,000.

  • In an employee stock ownership plan (ESOP), the maximum account balance in the plan subject to a five-year distribution period will rise to $1,050,000 from $1,035,000, while the dollar amount used to determine the lengthening of the five-year distribution period will increase to $210,000 from $205,000.

Non-401(k) Workplace Retirement Plan Limits

2014

2013

SIMPLE employee deferrals

$12,000

$12,000

SIMPLE catch-up deferrals

$2,500

$2,500

SEP minimum compensation

$550

$550

SEP annual compensation limit

$260,000

$255,000

Social Security wage base

$117,000

$113,700


Individual Retirement Accounts

  • The limit on annual contributions to an individual retirement account (IRA) will stay at $5,500. The additional catch-up contribution limit for those ages 50 and over will remain $1,000.

  • The deduction for taxpayers making contributions to a traditional IRA has been phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGIs) from $60,000 to $70,000, up from $59,000 to $69,000 in 2013.

  • For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the AGI phase-out range will be $96,000 to $116,000, up from $95,000 to $115,000.

  • For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction has been phased out for couples with an AGI from $181,000 to $191,000, up from $178,000 to $188,000.

  • For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and will remain $0 to $10,000.

  • For a Roth IRA, the AGI phase-out range for taxpayers making contributions will be $181,000 to $191,000 for married couples filing jointly, up from $178,000 to $188,000 in 2013. For singles and heads of household, the income phase-out range will be $114,000 to $129,000, up from $112,000 to $127,000. For a married individual filing a separate return who is covered by a retirement plan at work, the phase-out range will remain $0 to $10,000.

  • The AGI limit for the saver's credit (also known as the retirement savings contributions credit) for low- and moderate-income workers will rise to $60,000 for married couples filing jointly, up from $59,500 in 2013; $45,050 for heads of household, up from $44,250; and $30,000 for singles and married couples filing separately, up from $29,500.

Contribution Misperceptions Hinder Savings

Employees often have a skewed perception of retirement plan contribution limits. According to Mercer Workplace Survey results, the average participant believes that the tax-deferral limit is only $8,532, just under half the actual 2013 limit of $17,500.

Looking at intended savings rates, most appear close to the perceived limit but are still far off from the actual. For those nearing retirement (age 50-plus), the perception gap is even bigger.

The survey represents a national cross section of active 401(k) participants; online interviews were completed with 1,506 respondents between May 28 and June 5, 2013. 

 

By Age: Actual Contribution vs. Perceived Contribution Limit
(Average $)

Respondents were asked, "As far as you know, what is the maximum dollar amount you can defer from income taxes this year by contributing it to a 401(k)?," and "Not counting any contributions your employer may make to your 401(k) plan over the next 12 months, how much money, if any, do you expect to put into your 401(k) plan?"  

 
(click on chart to view enlargement)

Source: Mercer Workplace Survey, 2013.

 

"This data not only points to a troubling disconnect between perception and reality but also points to a false sense of security among 401(k) participants," according to Mercer's analysts. "It also begs the question whether participants are leaving some tax efficiency—knowingly or unknowingly—on the table."

Thirty-four percent said they would increase their 401(k) contribution to the tax-deferred maximum "if they could live the last 12 months over again," the survey found, which highlights the value of effectively communicating maximum contribution limits to employees and conveying how even small annual contribution increases can substantially boost the size of their retirement nest egg.

Stephen Miller, CEBS, is an online editor/manager for SHRM. 

Other 2014 Benefit Change Articles:
 

FICA Adjusts: Income Subject to Payroll Tax Increases in 2014, SHRM Online Benefits, October 2013 

For 2014, Higher Limits for HSA Contributions, SHRM Online Benefits, May 2013

FSA Use-It-or-Lose-It Rule Modified, SHRM Online Benefits, November 2013

Health Benefit Costs Could Jump in 2014, SHRM Online Benefits, November 2013

Related External Article:

For 2014, Increase in Some IRS Dollar Limits and Social Security Figures (printer-friendly PDF chart), Sibson Consulting, November 2013 

Related SHRM Articles:

Employers Boost 401(k) Match Contributions, Relax Eligibility Rules, SHRM Online Benefits, November 2013

Message to Employees: Saving 1% More Will Boost Retirement Income, SHRM Online Benefits, August 2013

Quick Links:

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 SHRM Online Retirement Plans Resource Page  

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