Update to the original article: On October 13, 2017, the Social Security Administration (SSA) announced that the maximum amount of earnings subject to the Social Security tax (taxable wage base) was to increase to $128,700 in 2018, from $127,200 in 2017. This increase was memorialized in IRS Notice 2017-64 and was based on the national wage data available at the time. In late October, however, a payroll service filed approximately 500,000 corrected Form W-2s that resulted in changes to the calculations used to determine the 2018 taxable wage base. Based on this updated wage data, the SSA revised the taxable wage base for 2018 to $128,400. These changes are reflected below.
The Internal Revenue Service recently announced the cost of living adjustments (COLA) for 2018. These COLAs affect various contribution and deduction limits for qualified retirement plans, as well as the deductible contribution limits for traditional Individual Retirement Arrangements (IRAs).
Internal Revenue Code Section 415(d) requires that the Secretary of the Treasury annually adjust these limits for cost-of-living increases. IRS Notice 2017-64 contains the COLAs that will take effect January 1, 2018.
Some limitations increased, while others remain unchanged from the 2017 limits. The more common limitations are summarized below, along with the applicable Code Section and/or Treasury Regulations Section (Regs).
- The limitation on the annual benefit under a defined benefit plan increases from $215,000 to $220,000. (Code Section 415(b)(1)(A)).
- The annual contribution limitation for defined contribution plans increases from $54,000 to $55,000 (Code Section (415(c)(1)(A)).
- The annual deferral limit for 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan increases from $18,000 to $18,500 (Code Sections 402(g)(1),402(g)(3)).
- The annual deferral limit for deferred compensation plans of state and local governments, and tax-exempt organizations increases from $18,000 to $18,500 (Code Section 457(e)(15)).
- The annual maximum considered compensation limit increases from $270,000 to $275,000 (Code Sections 401(a)(17), 404(l),408(k)(3)(C) and 408(k)(6)(D)(ii)).
- The dollar limitation for determining the maximum account balance in an Employee Stock Ownership Plan (ESOP), subject to a 5-year distribution period, increases from $1,080,000 to $1,105,000; and the dollar amount used to determine the lengthening of the 5-year distribution period increases from $215,000 to $220,00 (Code Section 409(o)(1)(C)(ii)).
- The limitation concerning the qualified gratuitous transfer of qualified employer securities to an ESOP increases from $45,000 to $50,000 (Code Section 664(g)(7)).
- The dollar limitation on premiums paid with respect to a Qualifying Longevity Annuity Contract (QLAC) increases from $125,000 to $130,000. (Code Section 1.401(a)(9)-6 and Regs. Section A-17(b)(2)(ii)).
- The Social Security Taxable Wage Base increases from $127,200 to $128,400.
- The annual compensation threshold for purposes of the definition of “Key Employee” remains at $175,000 (Code Section 416(i)(1)(A)(i)).
- The annual “look-back” compensation income limit for purposes of the definition of “Highly Compensated Employee” remains at $120,000 (Code Section 414(q)(1)(B)).
- The annual deferral limitation for SIMPLE retirement accounts stays at $12,500 (Code Section 408(p)(2)(E)).
- The maximum amount of catch-up contributions that individuals age 50 or over may make to SIMPLE 401(k) plans or SIMPLE retirement accounts remains at $3,000 (Code Section 414(v)(2)(B)(ii)).
- The compensation threshold for simplified employee pensions (SEPs) remains at $600 (Code Section 408(k)(2)(C)).
- The maximum amount of catch-up contributions that individuals age 50 or over may make to 401(k) plans, 403(b) plans, SEPs and governmental 457(b) plans remains at $6,000 (Code Section 414(v)(2)(B)(i)).
- The maximum amount that can be contributed to an IRA remains at $5,500. The IRA catch-up contribution limit for IRAs remains unchanged at $1,000 (Code Section 219(b)(5)(A)).
Quick reference guide to key limitations for 2017 and 2018:
|Item||2017 Limit||2018 Limit|
Elective Deferral Limit
Defined Contribution Plan
Defined Benefit Plan
Annual Compensation Limit
Catch-Up Contribution Limit
Highly Compensated Employee
Social Security Taxable
For more information on the COLA for 2018, contact us.