New Benefit Limits for 2006
For defined benefit plans, the limitation on the annual benefit is increased from $170,000 to $175,000. The annual addition limitation for defined contribution plans is increased from $42,000 to $44,000.
The annual compensation limit on maximum compensation that may be considered is increased from $210,000 to $220,000. The dollar limitation for a key employee in a top-heavy plan is increased from $135,000 to $140,000.
For employee stock ownership plans, the dollar amount for determining the maximum account balance subject to a 5-year distribution period is increased from $850,000 to $885,000, while the dollar amount used to determine the lengthening of the 5-year distribution period changes from $170,000 to $175,000.
The limitation used in the definition of highly compensated employee is increased from $95,000 to $100,000.
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 $315,000 to $325,000.
The $10,000 limitation for SIMPLE retirement accounts and the $450 compensation amount for simplified employee pensions (SEPs) remain unchanged.
In addition, certain retirement plan limits are scheduled by law to increase in 2006. They are as follows:
The limitation on the exclusion for elective deferrals, which applies to 401(k) plans and 403(b) annuities, is increased from $14,000 to $15,000. The limitation on deferrals under Code Section 457 deferred compensation plans of state and local governments and tax-exempt organizations is increased from $14,000 to $15,000.
The dollar limitation for catch-up contributions to an applicable employer plan for individuals aged 50 or over is increased from $4,000 to $5,000, except for SIMPLE plans for which the limitation is increased from $2,000 to $2,500.
Lastly, the Social Security Administration has announced that the taxable wage base for computing the Social Security tax (OASDI) in 2006 rises to $94,200 from $90,000 in 2005--an increase of about 4.67%. The $4,200 increase is attributable to an increase in average total wages.