United States: IRS Announces Adjustments To Retirement Plan Limits For 2001

The Internal Revenue Service has announced cost-of-living increases for various retirement plan limits under the Internal Revenue Code (the "Code") for 2001. There are some significant increases from the limits in place for 2000.

The maximum annual benefit payable at a participant's Social Security retirement age under a qualified defined benefit plan in 2001 has increased from $135,000 to $140,000. The dollar limit on "annual additions" (basically contributions and forfeitures) on behalf of a participant to a qualified defined contribution plan will increase to $35,000 in 2001; this limit had previously been set at $30,000 since 1983.

The dollar limit for 2001 on employee pre-tax salary deferral contributions to Section 401(k) plans and Section 403(b) annuity plans will remain at $10,500.

An individual will be a "highly compensated employee" (HCE) for 2002 if he or she earns more than $85,000 in 2001. This is the same limit which has applied in determining HCE status for 2001 (i.e., an employee who earns more than $85,000 in 2000). However, an employer may elect to require, as a condition of HCE status in 2001, that an employee be in the top 20% of all employees when ranked on the basis of compensation paid during 2000.

Without regard to an employee's compensation during the preceding year, the Code treats him or her as an HCE if he or she is a five percent-or-more owner during either the current year or the preceding year.

The limit on annual compensation which may be taken into account for qualified plan purposes is unchanged at $170,000 for 2001.

The dollar amount for determining the maximum account balance in an employee stock ownership plan subject to a five-year distribution period is increased from $755,000 in 2000 to $780,000 for 2001, while the dollar amount used to determine the lengthening of the five-year distribution period is increased from $150,000 in 2000 to $155,000 in 2001.

The compensation threshold for participation in a simplified employee pension plan remains unchanged at $450 for 2001; employees with compensation below this limit do not have to be allowed to participate in the plan. The includable compensation under a simplified employee pension plan remains unchanged at $170,000 for 2001. The dollar limit on a participant's salary reduction contributions to a SIMPLE retirement account is increased from $6,000 in 2000 to $6,500 in 2001.

The limitation on employee deferrals to deferred compensation plans of state and local governments and tax-exempt organizations under Code Sections 457(b)(2) and 457(c)(1) is increased from $8,000 in 2000 to $8,500 in 2001.

The IRS notes that these limitations may be affected by legislation now pending in Congress. At this time, however, it is unclear whether any comprehensive tax bill will be passed this year or, if passed, whether it will be signed by the President.