The Internal Revenue Service has announced cost-of-living adjustments applicable
to dollar limitations for pension plans and other items for Tax Year 2004.
Section 415 of the Internal Revenue Code provides for dollar limitations on
benefits and contributions under qualified retirement plans. It also requires
that the commissioner annually adjust these limits for cost-of-living increases.
Many of the pension plan limitations will change for 2004. 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 2004.
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 $12,000
to $13,000. 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 2004. Effective January 1, 2004, the limitation
on the annual benefit under a defined benefit plan under section 415(b)(1)(A)
is increased from $160,000 to $165,000. For participants who separated from
service before January 1, 2004, the limitation for defined benefit plans under
section 415(b)(1)(B) is computed by multiplying the participant's compensation
limitation, as adjusted through 2003, by 1.0220.
The limitation for defined contribution plans under section 415(c)(1)(A) is
increased from $40,000 to $41,000.
The 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 follows:
The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C),
and 408(k)(6)(D)(ii) is increased from $200,000 to $205,000.
The dollar limitation under Section 416(i)(1)(A)(i) concerning the definition
of key employee in a top-heavy plan remains unchanged at $130,000. 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 $810,000 to $830,000, while the dollar amount used
to determine the lengthening of the 5-year distribution period is increased
from $160,000 to $165,000.
The limitation used in the definition of highly compensated employee under
Section 414(q)(1)(B) remains unchanged at $90,000.
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 $300,000 to $305,000.
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 $80,000. The compensation
amount under Section 1.61-21(f)(5)(iii) is increased from $160,000 to $165,000.
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 $12,000 to $13,000.
The limitation under Section 408(p)(2)(E) regarding SIMPLE retirement accounts
is increased from $8,000 to $9,000.
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 $12,000 to $13,000.
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 $2,000 to $3,000.
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 $1,000 to $1,500.
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.
Those with specific concerns about their tax accounts should call IRS Customer
Service at 1-800-829-1040.
