What’s the Impact of 2015 IRS Retirement Plan Limits?

The IRS just announced the 2015 retirement plan benefit limits and we’re seeing some modest increases from 2014. What does it all mean for employer-sponsored retirement plans? This post analyzes the practical effects for both defined contribution (DC) and defined benefit (DB) plans, followed by a table summarizing the limit changes.

Changes affecting both DB and DC plans

  • Qualified compensation limit increases from $260,000 to $265,000. Highly-paid participants will now have more of their compensation “counted” towards qualified plan benefits and less towards non-qualified plans. This helps for both nondiscrimination testing as well as for benefits.
  • HCE compensation threshold increases from $115,000 to $120,000. For calendar year plans, this will first affect 2016 HCE designations because $120,000 will be the threshold for the 2015 “lookback” year. Slightly fewer participants will meet the new HCE compensation criteria, which will have two direct outcomes:
    • Plans may see better nondiscrimination testing results (including ADP results) if there are fewer participants at the low end of the HCE range, especially those with big deferrals. It could make a big difference for plans that were close to failing the tests.
    • Fewer HCEs means that there are fewer participants who must receive 401(k) deferral refunds if the plan fails the ADP test.

DC-specific increases and their significance

  • The annual DC 415 limit increases from $52,000 to $53,000 and the 401(k) deferral limit increases from $17,500 to $18,000. A $1,000 increase to the overall DC limit and $500 increase to the deferral limit may not seem like much, but it will allow participants to get a little more “bang” out of their DC plan. This means that individuals can get up to $35,000 from employer match and profit sharing ($53K – $18K) if they maximize their 401(k) deferrals. Previously, their profit sharing limit would have been $34,500 ($52K – $17.5K).
  • 401(k) “catch-up” limit increases from $5,500 to $6,000. Participants age 50 or older finally get an increase in the extra amount they can put into a 401(k) plan. Combined with the new overall DC limit, they can effectively get a maximum DC deduction of $59,000 ($53K + $6K).
  • The increase in the 401(k) deferral limit could be of limited value to companies whose 401(k) plans consistently fail the IRS Actual Deferral Percentage (ADP) test. In those situations, HCE deferrals are restricted to an amount below the statutory threshold so a limit increase may not matter. However, the catch-up limit increase may provide some solace to HCEs age 50 or older since it is not constrained by the ADP test.

DB-specific increases and their significance

  • DB 415 maximum benefit limit (the “dollar” limit) remains at $210,000. It’s unfortunate that this limit didn’t increase for 2015 because it can constrain individuals with very large DB benefits (say, shareholders in a professional firm cash balance plan) who were looking forward to increasing their DB plan contributions/deductions.

Below is a table summarizing the main changes to employer-sponsored retirement plan limits for 2015.

2015 IRS limits

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