The Internal Revenue Service has announced the cost-of-living adjustments applicable to dollar limitations for retirement plans for 2005. They are as follows:
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For defined benefit plans, the limitation on the annual benefit is increased from $165,000 to $170,000. The annual addition limitation for defined contribution plans is increased from $41,000 to $42,000.
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The annual compensation limit on maximum compensation that may be considered is increased from $205,000 to $210,000. The dollar limitation for a key employee in a top-heavy plan is increased from $130,000 to $135,000.
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For employee stock ownership plans, the dollar amount for determining the maximum account balance subject to a 5-year distribution period is increased from $830,000 to $850,000, while the dollar amount used to determine the lengthening of the 5-year distribution period is increased from $165,000 to $170,000.
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The limitation used in the definition of highly compensated employee is increased from $90,000 to $95,000.
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The annual compensation limitation for eligible participants in certain governmental plans that allowed cost-of-living adjustments to the compensation limitation under the plan to be taken into account is increased from $305,000 to $315,000.
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The compensation amount for simplified employee pensions (SEPs) remains unchanged at $450.
In addition, certain limits are scheduled by law to increase in 2005. They are as follows:
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The limitation on the exclusion for elective deferrals, which applies to 401(k) plans, 403(b) annuities, SEPs, and the federal government's Thrift Savings Plan, is increased from $13,000 to $14,000; the limitation for SIMPLE retirement accounts is increased from $9,000 to $10,000. The limitation on deferrals under deferred compensation plans of state and local governments and tax-exempt organizations is increased from $13,000 to $14,000.
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The dollar limitation for catch-up contributions to an applicable employer plan for individuals aged 50 or over is increased from $3,000 to $4,000, except for SIMPLE plans for which the limitation is increased from $1,500 to $2,000.
Employers should also take that the Social Security Administration has announced that the wage base for computing the Social Security tax (OASDI) in 2005 rises to $90,000 from $87,900 in 2004, an increase of about 2.38%.
