The Internal Revenue Service has announced cost-of-living adjustments applicable
to dollar limitations for pension plans and other items for tax year 2006.
Section 415 of the Internal Revenue Code provides for dollar limitations on
benefits and contributions under qualified retirement plans. It also requires
that the IRS commissioner annually adjust these limits for cost of living increases.
Many of the pension plan limitations will change for 2006. For most of the
limitations, the increase in the cost-of-living index met the statutory thresholds
that trigger their adjustment. Furthermore, several limitations, set by the
Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), are scheduled
to increase at the beginning of 2006.
For example, under EGTRRA, the limitation under section 402(g)(1) on the exclusion
for elective deferrals described in section 402(g)(3) is increased from $14,000
to $15,000. This limitation affects elective deferrals to section 401(k) plans
and to the Federal Government's Thrift Savings Plan, among other plans.
Cost-of-Living Limits for 2006
Effective January 1, 2006, the limitation on the annual benefit under a defined
benefit plan under section 415(b)(1)(A) is increased from $170,000 to $175,000.
For participants who separated from service before Jan. 1, 2006, the limitation
for defined benefit plans under section 415(b)(1)(B) is computed by multiplying
the participant's compensation limitation, as adjusted through 2005, by 1.0383.
The limitation for defined contribution plans under section 415(c)(1)(A) is
increased from $42,000 to $44,000.
The Internal Revenue Code provides that various other dollar amounts are to
be adjusted at the same time and in the same manner as the dollar limitation
of section 415(b)(1)(A). These dollar amounts and the adjusted amounts are as
The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C),
and 408(k)(6)(D)(ii) is increased from $210,000 to $220,000.
The dollar limitation under Section 416(i)(1)(A)(i) concerning the definition
of key employee in a top-heavy plan is increased from $135,000 to $140,000.
The dollar amount under Section 409(o)(1)(C)(ii) for determining the maximum
account balance in an employee stock ownership plan 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 is increased
from $170,000 to $175,000.
The limitation used in the definition of highly compensated employee under
Section 414(q)(1)(B) is increased from $95,000 to $100,000.
The annual compensation limitation under Section 401(a)(17) for eligible participants
in certain governmental plans that, under the plan as in effect on July 1, 1993,
allowed cost of living adjustments to the compensation limitation under the
plan under Section 401(a)(17) to be taken into account, is increased from $315,000
The compensation amount under Section 408(k)(2)(C) regarding simplified employee
pensions (SEPs) remains unchanged at $450.
The compensation amounts under Section 1.61 21(f)(5)(i) of the Income Tax Regulations
concerning the definition of "control employee" for fringe benefit
valuation purposes remains unchanged at $85,000. The compensation amount under
Section 1.61 21(f)(5)(iii) is increased from $170,000 to $175,000.
The limitation under Section 408(p)(2)(E) regarding SIMPLE retirement accounts
remains unchanged at $10,000.
Limitations Specified by Statute
The Code, as amended by the Economic Growth and Tax Relief Act of 2001 (EGTRRA),
specifies the applicable dollar amount for a particular year for certain limitations.
These applicable dollar amounts are as follows:
The limitation under Section 402(g)(1) on the exclusion for elective deferrals
described in Section 402(g)(3) is increased from $14,000 to $15,000.
The limitation on deferrals under Section 457(e)(15) concerning deferred compensation
plans of state and local governments and tax-exempt organizations is increased
from $14,000 to $15,000.
The dollar limitation under Section 414(v)(2)(B)(i) for catch-up contributions
to an applicable employer plan other than a plan described in Section 401(k)(11)
or 408 (p) for individuals aged 50 or over is increased from $4,000 to $5,000.
The dollar limitation under Section 414(v)(2)(B)(ii) for catch-up contributions
to an applicable employer plan described in Section 401(k)(11) or 408 (p) for
individuals aged 50 or over is increased from $2,000 to $2,500.
Administrators of defined benefit or defined contribution plans that have received
favorable determination letters should not request new determination letters
solely because of yearly amendments to adjust maximum limitations in the plans.