In Practice November 15, 2006

2007 Compensation and Benefits Limits Published

Last week, the Internal Revenue Service (IRS) unveiled the maximum benefit and contribution limits on qualified retirement plans for 2007, and, for most of the limitations, the increase in the cost-of-living index met the legal thresholds to trigger the changes.
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The Pension Protection Act eliminated the sunset provisions on limit increases introduced with the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), but many of the limits will continue to increase based on cost-of-living adjustments. Under Section 402(g), retirement plan participants will be allowed to defer up to $15,500 to their 401(k) plan in 2007, an increase of $500 over the 2006 limit, but just half the $1,000/year step-up that followed EGTRRA’s passage. The limit on deferrals under 457(e)(15) deferred compensation plans of state and local governments and tax-exempt organizations is also increased from $15,000 to $15,500. The Section 415 annual additions limit, the maximum total contribution to defined contribution plans, including employer contributions, will rise to $45,000 per participant from $44,000.

Also a change from previous years, the allowed “catch-up” contribution, available to those who will be age 50 or older by the end of the year, is not tied to a cost-of-living adjustment provision, and will remain unchanged at $5,000 in 2007.

For purposes of non-discrimination testing, the highly compensated threshold remains $100,000 a year, while the annual compensation limit under Sections 401(a) (17), 404(l), 408(k) (3) (C), and 408(k) (6) (D) (ii) is going up from $220,000 to $225,000, and the dollar limit under Section 416(I) (1) (A) (I) concerning the definition of key employee in a top-heavy plan is increased from $140,000 to $145,000.

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The limitation under Section 408(p)(2)(E) regarding SIMPLE retirement accounts is increased from $10,000 to $10,500.

The limit on the annual benefit under a defined benefit plan under Section 415(b) (1) (A) is being bumped up from $175,000 to $180,000, and the amount of employee compensation that can be considered in calculating pension benefits and contributions to defined contribution plans will rise to $225,000 from $220,000.

This annual change in deferral limits is a great way to lead off an education campaign at your clients’ workplaces. Not only does it spur discussion with your CFO or CEO clients (the amount of income subjected to FICA withholding also increased, this year to $97,500 from $94,200), and while they might already be maxing out the current limits, this is a chance to plan ahead. It can also be a good point of contact with the general employee base, especially those over 50 who are eligible for the catch-up provisions, and the Saver’s Credit and Roth 401(k), which were given a new lease on life with the Pension Protection Act.

A table with these changes detailed is online at http://www.plansponsor.com/solution_type1/?RECORD_ID=11611

In Practice November 15, 2006

Small Biz Owners Clueless on PPA

A recent poll of 507 small business (companies with 50 employees or fewer, including one-person, owner-operated businesses) owners or CEO’s/Presidents commissioned by ShareBuilder 401(k) found that many small business owners are still focusing on Social Security as a primary source of retirement income, both for themselves and their employees.
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A majority of those surveyed (61%) had never heard of the Pension Protection Act (PPA). Not surprisingly, small business owners were much more likely to be concerned with running their company than legislation that, most likely, in their opinion, does not have significant applicability.

 

Even Aware Unmoved

 

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Of the 39% who were aware of the PPA, 76% said it has no impact on their plans to offer a 401(k) plan to their employees, according to a news release on the survey. However, while the permanency of the expanded contribution and benefit limits under EGTRRA do make some aspects of offering a retirement plan more advantageous for small business owners, this might not be the best selling point for this audience. Consider that a mere 25% said they plan to use a 401(k) to fund part of their retirement income, possibly because these owners have private savings, or plan to use the money from selling their business as retirement income.

Less than 40% of small business owners offer any form of a retirement program to their employees and only 14% of the respondents currently offer a 401(k) plan to their employees – an obviously untapped market for advisers to prospect. Advisers can help small business owners understand the importance of company-sponsored 401(k) plans and other retirement benefits in supplementing our Social Security system.

For employers who don’t want to offer a 401(k) plan to employees, advisers can help them review the many other retirement plan possibilities that might better suited for their workforce, including defined benefit plans and IRA based programs.

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