On October 18, 2006, the Internal Revenue Service ("IRS") announced the 2007 cost of living adjustments applicable to dollar limits on benefits and contributions, annual compensation limits, and other dollar limits that will apply to tax-qualified retirement plans and Simplified Employee Pension plans ("SEPs").
Section 415 Limits: Section 415 of the Internal Revenue Code ("Code") provides for dollar limits on benefits and contributions under tax-qualified retirement plans. Effective January 1, 2007, the limit for defined benefit plans under Code section 415(b)(1)(A) is increased from $175,000 to $185,000. The compensation based limit factor for participants who terminate service before January 1, 2007 is computed by multiplying the participant’s compensation limitation, as adjusted through 2006, by 1.0334. The dollar limit for defined contribution plans under Code section 415(c)(1)(A) is increased from $44,000 to $45,000 for 2007.
Elective Deferral Limits: For 2007, the maximum pre-tax contribution that may be made under Code section 401(g)(1) to a 401(k) plan and 403(b) tax-sheltered annuity by an individual is increased from $15,000 to $15,500.
Catch-Up Contributions: For 2007, the dollar limit under Code section 414(v)(2)(B)(i) for catch-up contributions to an applicable employer plan other than a plan described in Code section 401(k)(11) (SIMPLE Plans) or 408(p) (SIMPLE Retirement Accounts) for individuals aged 50 or over remains unchanged at $5,000. The dollar limit under Code section 414(v)(2)(B)(ii) for catch-up contributions to an applicable employer plan described in Code section 401(k)(11) (SIMPLE Plans) or 408(p) (SIMPLE Retirement Accounts) for individuals aged 50 or over remains unchanged at $2,500.
Annual Compensation Limit: The amount of annual compensation that may be taken into consideration under tax-qualified retirement plans and SEPs under Code sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) is increased from $220,000 to $225,000.
Compensation Based Accrual Limit for Certain Governmental Plans: Governmental plans in effect on July 1, 1993 are permitted to utilize transition rules for compliance with the Code section 401(a)(17) limit. If the transition rules apply, the plan’s 2007 compensation limit is increased from $325,000 to $335,000.
Definition of "Key Employee:" The dollar limit used to define an officer "Key Employee" under Code section 416(i)(1)(A)(i) in a top-heavy plan is increased from $140,000 to $145,000.
Highly Compensated Employee Threshold: The dollar limit used to define a highly compensated employee under Code section 414(q)(1)(B) for nondiscrimination testing purposes is unchanged at $100,000.
ESOP Distribution Period: Code section 409(o)(1)(C) imposes a maximum time limit for distributing a participant’s Employee Stock Ownership Plan ("ESOP") account balance. As a general rule, the maximum distribution period is five years. A participant with a large account balance, however, may face a maximum distribution period of between five and ten years. The dollar amount for determining the maximum account balance in an ESOP subject to a five-year distribution period is increased from $885,000 to $915,000, and the dollar amount used to determine the lengthening of the five-year distribution period is increased from $175,000 to $180,000.
SEP Limits: A SEP must cover employees who meet certain age and service criteria and receive at least a minimum dollar amount of compensation. For 2007, the compensation threshold is increased from $450 to $500.
SIMPLE Plans: For 2007, the maximum employee pre-tax contribution that may be made to a SIMPLE plan under Code section 408(p)(2)(E) is increased from $10,000 to $10,500.
Section 457 Plans for State and Local Governments and Tax-Exempt Organizations: For 2007, the maximum pre-tax contribution that may be made to a section 457 plan under Code section 457(e)(15) is increased from $15,000 to $15,500.
Identification of Control Employees for Fringe Benefits: The valuation rules that apply to certain fringe benefits depend on whether the employee is a "control employee." The compensation requirement under Section 1.61-21(f)(5)(i) of the income tax regulations for determining when an officer is a "control employee" is increased from $85,000 to $90,000. The compensation threshold for determining whether other employees are control employees under Section 1.61-21(f)(5)(iii) is increased from $175,000 to $180,000.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
