2004 Cost-of-Living Adjustments for Retirement Plans



The Internal Revenue Service announced yesterday the new cost-of-living adjustments applicable to retirement plans in 2004.

The annual allocation limit for defined contribution plans changes from $40,000 to $41,000. The limitation on the annual benefit under a defined benefit plan also changes from $160,000 to $165,000. The annual limit on compensation that can be taken into account under any tax-qualified plan is changed from $200,000 to $205,000.

The limitation on the exclusion for elective deferrals in 401(k) and 403(b) plans is increased from $12,000 to $13,000. The same change applies to deferrals under deferred compensation plans of state and local governments and tax-exempt organizations. The limitation regarding SIMPLE retirement accounts is increased from $8,000 to $9,000.

The dollar limitation for catch-up contributions to an applicable employer plan (other than a SIMPLE plan) for individuals aged 50 or over is increased from $2,000 to $3,000. For SIMPLE plans, the dollar limitation is increased from $1,000 to $1,500.

The annual compensation limitation 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 to be taken into account is increased from $300,000 to $305,000.

The dollar amount for determining the maximum account balance in an ESOP subject to a five-year distribution period is increased from $810,000 to $830,000, while the dollar amount used to determine the lengthening of the five-year distribution period changes from $160,000 to $165,000.

The Social Security Administration has also announced recently that the Social Security wage base will increase from $87,000 in 2003 to $87,900 in 2004.

Some of the retirement plan limitations will not change because the increase in the cost-of-living index fell below the statutory thresholds. Unchanged limits for 2004 include:

The dollar limitation in the definition of a key employee in a top-heavy plan remains $130,000.

The $90,000 limitation is still used in the definition of a highly compensated employee.

The compensation triggering eligibility for participation in a simplified employee pension (SEP) remains unchanged at $450.

If you have any questions regarding the changes in the dollar limitations, please contact one of the employee benefits attorneys at Boult, Cummings, Conners & Berry, PLC.