IRS Announces 2012 Retirement Plan Limits

The various retirement plan limits have been announced for 2012. Here is a brief recap:

Salary Deferral Limit for 401(k) and 403(b) Plans is $17,000 (up from $16,500).  Additional Salary Deferral for someone Age 50 by 12/31/2012 is $5,500 (stayed the same).  Therefore a 50 year old can defer up to $22,500 in 2012 (increased from $22,000).  The maximum amount of compensation counted for plan purposes is $250,000 (previously $245,000).  Maximum Annual Additions Limit from all contributions is $50,000 (increased from $49,000 and you can add $5,500 if age 50 or more if salary deferrals available).  The maximum Defined Benefit Plan retirement amount is $200,000 per year ($190,000 a year previously).  The amount of compensation in 2012 that would make someone an HCE in 2013 is $115,000 (up from $110,000 for 2009, 2010 and 2011).  The new Social Security Taxable Wage Base is $110,100 (up from $106,800).

For a more complete chart go here: Retirement Plan Limitations Chart

Cash Balance Plans Even More Attractive

Some of the major issues that bothered potential sponsors of Cash Balance Plans have been dealt with in new proposed regulations. See this write-up from our partner actuarial firm, Kravitz.


http://cashbalancedesign.com/articles/documents/newcashbalanceregulations.pdf

If you have any professionals firms (CPA's, Attorneys, Engineers, Surgeons, etc.) who want to get beyond the 401(k) limit of $54,500, give us a call - Paul Carlson (650) 341-3322.

401(k) and Other Retirement Plan Limitations Stay Unchanged for 2011

The 401(k), 403(b) and other Retirement Plan limits will remain the same for 2011 as they have been for 2009 and 2010. There will be no cost of living adjustment for the second year in a row.


Salary Deferral Limit: $16,500
Over Age 50 Make-up contribution: $5,500
Therefore, total deferrals if over age 50 by 12/31/2011: $22,000
Definition of HCE - someone who made over $110,000 the prior year
Maximum Compensation Limit for Plan Purposes: $245,000
Social Security Wage Base: $106,800

To see a chart of more limits, click: www.401kacademy.com/401kpdf/limitationschart.pdf

New Video Available Explaining Cash Balance Plans

The actuarial firm that we partner with for Cash Balance Plans has produced an excellent video on the subject:

http://videostreamingnow.com/cashbalance/index.html

Leading Employee Benefits Law Firm Newsletters

Plan Sponsors, Financial Advisors and CPA's might all want to consider subscribing to some excellent newsletters from one of the leading employee benefits law firms.  Here is a link to do so:

http://www.reish.com/practice_areas/subscribe.cfm

Annual Plan Sponsor Survey Results

Results of an annual survey of some 5,000+ Plan Sponsors by Plan Sponsor magazine

http://www.plansponsor.com/MagazineArticle.aspx?id=6442456027

Case Study - 42 Employee Firm with 4 Owners

Client told us they wanted to continue to use their 401(k) plan for their 42 employees without much change (3% Safe Harbor plus 2% Profit Sharing), but that they would be interested in getting more money put away for the Owners and several key people. They gave us a budget of $50,000 additional for two owners; $30,000 for the other two owners and $10,000 each for three key people or $190,000 total. They will want to do more than that when the economy recovers, but that was their budget for 2009.

We included the seven of them in the Cash Balance Plan for the $190,000 budget and also covered only their 10 lowest paid employees and the cost for them to pass all discrimination testing, etc. was only $6,300. So, $190,000 for principals of $196,300 total is 96.8%.

Cash Balance additions to existing 401(k)'s for highly successful professional plan sponsors is a great retirement plan savings tool and tax-shelter solution.

DB(k) Is Not the Same as a Cash Balance Plan

The Pension Protection Act of 2006 added Code Section 414(x) effective for 2010. The type of plan added by PPA of 2006 is called a DB(k) or "eligible combination plan".  You will start to hear more and more about this type of plan in the next couple of years.  We just wanted to make sure you know that this is not what our blog is about.  We are using this blog to educate you on Cash Balance Defined Benefit Plan in combination with 401(k) Plans.


The DB(k) melds a 401(k) savings plan with a small Defined Benefit promise. It contains:

(1) A defined benefit equal to 1% of final average pay for each year of the employee's service, with up to 20 years of service counted - so somebody with 20 years of service could earn a 20% of pay retirement benefit;

(2) An automatice enrollment feature for the 401(k) portion. Unless an employee specifically opts out or changes the contribution level, 4% of pay is automatically set as the employee's level of salary deferrals;

(3) An employer match of at least 50% of employee contributions, with a maximum required match of 2% of pay.

As you can see, the new DB(k) is very defined and lacks a certain amount of flexibility, but it might be attractive to certain employers. However, the IRS is just now asking for comments from the pension industry as to these types of plans to help them write the rules pertaining to them. I would guess that regulations will not be published any time soon and therefore none of the retirement plan documents providers will be able to develop plan language to implement these plans until a few months after the regulations are published. So, it might be 2011 before these plans can actually start being utilized.

We will keep you informed about the DB(k) option as it develops.
 
We would characterize the new DB(k) as a minimal 401(k) plan combined with a minimal DB plan - all in one plan document.  We would characterize the 401(k) Cash Balance Combo arrangement discussed in this blog as a maiximum 401(k) combined with a separate and maximum Cash Balance plan - in two separate documents.  We just did not want you to get confused when others starting sending you data on the new DB(k) - it is NOT the same maxed-out attractive plan approach we can provide through the 401(k) Cash Balance Combo.

401(k) Cash Balance Plans - the Basic Concept

In very simple language, adding a Cash Balance Plan to supplement an existing 401(k) Plan allows the high income business owners and professionals to contribute substantially more money on a pre-tax basis to their retirement plans.

Example, for 2009, the maximum contribution for a high income business owner to a 401(k) plan is $54,500, assuming they are age 50 or more by 12/31/09.  The would normally be accomplished by having a Safe Harbor Cross Tested 401(k) Plan.  But, in the right circumstances, you can add a Cash Balance Plan and put away $100,000 to $150,000 (or more) additional for the older business owners without raising the cost of contributions for the support staff significantly.

That's it, in a nutshell - let high income business owners shelter $100,000 to $150,000 more than they can do with a 401(k) Plan alone without normally having to increase contributions for support staff significantly.