Retirement plans are an important employee benefit offered by many companies. The rules are always changing, and 2017 was no exception. If your business has a qualified retirement plan or you're thinking of offering one, here are some of the new dollar amounts to account for in budgeting for plan contributions and for payroll adjustments in 2018, as well as other new changes needing your attention.
Effective 2018, the IRS adjustments to various dollar amounts are:
- 401(k) plans. The basic salary reduction limit is increased to $18,500 (up from $18,000 in 2017). The additional amount for those who will be at least 50 years old by the end of the year remains $6,000. Thus, for an employee who is 58 years old, their maximum elective deferral for 2018 is $24,500.
- Simplified Employee Pensions (SEPs) and profit-sharing plans. The maximum deductible employer contribution for 2018 is $55,000. It was $54,000 in 2017.
- Pension plans. The maximum annual benefit for a defined benefit (pension) plan for 2018 is $220,000. It was $215,000 in 2017.
- Compensation. In figuring contributions and benefits under a qualified retirement plan, the maximum amount of taxable compensation that can be taken into account for 2018 is $275,000. In 2017, it was $270,000.
The dollar limits for elective deferrals for SIMPLE IRAs in 2018 remain at $12,500, plus an additional $3,000 for those who will attain age 50 by year-end. For employers that have payroll deduction IRAs, the dollar limits on contributions for 2018 are unchanged. They remain at $5,500, plus an additional $1,000 for those age 50 and older in 2018.
New law changes
The Tax Cuts and Jobs Act did not make any substantial changes to the rules for qualified retirement plans. However, changes to tax rates for owners of pass-through entities may impact decisions about whether to contribute to a qualified retirement plan. If the tax rate is lower for a particular business owner, the tax benefit of making a deductible contribution is reduced. However, offering a qualified retirement plan isn't only about tax breaks; it's also about attracting and retaining valued employees in an ever-tightening job market by helping them save for retirement.
The Disaster Relief Act of 2017 to assist victims of Hurricanes Harvey, Irma, and Maria, contained a number of relief measures tied to qualified retirement plans. Some of these may necessitate action by affected employers in 2018, including:
- Loans to participants. Usually, the plan must allow for loans before they can be made, but the law said that loans could be made and then plans would have to be amended accordingly. Also, loans usually capped at the lesser of one-half the account balance or $50,000, but the law ups the cap to $100,000 for loans before January 1, 2019. For loans outstanding at the time of the hurricane, there's a one-year suspension for repayments. This means that the five-year repayment period required for plan loans (other than those to buy a home) effectively becomes six years, although interest for the suspension period still applies, so repayments need to be adjusted accordingly. For new loans, the repayment period does not have to start immediately; it is delayed by one year.
- Distributions. Qualified hurricane distributions (distributions to participants with a main home in a hurricane disaster area that are made before January 1, 2019) can be recontributed to their accounts within three years. Also, for early distributions up to $100,000 to a plan participant under age 59½ that are made before January 1, 2019, the 10 percent penalty does not apply. The 20 percent withholding on plan distributions does not apply to qualified hurricane distributions.
Be sure that your plan documents are up-to-date. If you maintain a plan that was created by a financial institution, it should provide you with updated documents. Retain them with your tax and financial records. If you have questions about your existing plan or wish to establish one, talk with your CPA, retirement services provider, or financial advisor.