This Update reports indexed Internal Revenue Service (IRS) limits for 2018 that are of interest to public sector retirement plan sponsors. Because some state and local government employees are covered by Social Security, the Update also reports Social Security figures for 2018.
The 2018 IRS dollar limits for qualified plans and other tax-favored retirement plans are determined using Consumer Price Index (CPI) data. The latest data, released on October 13, 2017, showed that the CPI for All Urban Consumers (CPI-U) increased 0.5 percent over the 12 months that ended September 30, 2017. Such a small increase in the CPI-U means that some limits increase for 2017 and some do not because of differences in the way increases are calculated for different limits, for example, differences in the rounding rules. The IRS issued Notice 2017-64 announcing the changes on October 19, 2017. The table below compares some of the 2018 limits to those limits for 2017.
|IRS Retirement Plan Limits||2017||2018|
|Maximum §415(b) Annual Payout at Age 62 from a Defined Benefit Plan1||$215,000||$220,000|
|Maximum §415(c) Annual Addition to a Defined Contribution Plan Account||54,000||55,000|
|Annual Elective 401(k), 403(b) and 457(b) Deferral Limit||18,000||18,500|
|Annual 401(k), 403(b) and 457(b) Catch-Up Limit (Age 50 and Older)||6,000||Unchanged|
|Maximum 401(a)(17) Annual Compensation Amount Considered for Qualified Plans and 403(b) Plans||270,000||275,000|
|Maximum §401(a)(17) Annual Compensation Amount Considered for Public Sector Plans That Were Able to Grandfather the Old Dollar Limit2||400,000||405,000|
2 When the Omnibus Budget Reconciliation Act of 1993 reduced the annual compensation limit from $200,000 to $150,000, it allowed public sector plans to avoid applying the reduced compensation limit for grandfathered participants (generally, those who became participants in the plan before January 1, 1996). The 2017 grandfathered amount, as subsequently indexed under 401(a)(17), is shown in the table above.
The Social Security cost of living adjustment (COLA) for 2018 will be 2 percent. The Social Security wage base and earnings test will also increase for 2018. A press release on this news, a fact sheet on 2018 Social Security figures and information about how the COLA is calculated are on the Social Security Administration’s website. The table below compares the 2018 figures to the 2017 figures.
|Social Security Benefit Tests and Limits||2017||2018|
|Wage Base for Social Security Tax1||$127,200||$128,400!|
|Social Security National Average Wage Index2||$48,098.63
|Primary Insurance Amount (PIA) Formula:3
a) First Bend Point
b) Second Bend Point
|Maximum Social Security Benefit at Social Security Normal Retirement Age (SSNRA)4||$2,687/Month||$2,788/Month|
|Earnings Test — Early Retirement (Age 62)
(Amount that Can Be Earned before Benefits Are Cut)5
1 All earnings are subject to the Medicare tax. As noted in the box on page 1, the SSA adjusted the maximum amount of earnings subject to the Social Security tax for 2018. That adjustment affected the “bend points” noted in the fourth row of this table.
2 This amount is not tied to the CPI-W, but rather to earnings as reported to the Social Security Administration (SSA). The 2016 average (which is relevant for 2018) and background can be found on the SSA website.
3 PIA formula “bend points” are updated each year to reflect changes in the National Average Wage Index. The 2018 bend points can be found on the SSA website
4 The maximum Social Security benefit at SSNRA is not tied to the CPI. It is based on the PIA formula (reflecting updated bend points) where a worker’s earnings are at the maximum taxable amount for his or her career. For workers born in 1943-1954, the SSNRA is age 66. Information on how SSNRA varies by birth year is on the SSA website.
5 In the year of attaining SSNRA, the early retirement earnings test is higher. For those attaining SSNRA in 2018, the maximum amount that can be earned before benefits are cut will be $45,360 until the month of attaining SSNRA, up from $44,880 in 2017. This higher earnings test applies only to earnings in months prior to the month of SSNRA attainment. After attaining SSNRA, individuals can receive their full benefits regardless of how much they earn.
For more information about how these new limits and amounts may affect your plan, please contact your Segal consultant or the Segal office nearest you.
Update is Segal Consulting’s electronic newsletter summarizing compliance news. Update is for informational purposes only and should not be construed as legal advice. It is not intended to provide guidance on current laws or pending legislation. On all issues involving the interpretation or application of laws and regulations, plan sponsors should rely on their attorneys for legal advice.
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Copyright © 2017 by The Segal Group, Inc. All rights reserved.
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NEW! On November 27, 2017, the Social Security Administration (SSA) announced an adjustment to the amount of the 2018 Social Security wage base (the maximum amount of earnings subject to the Social Security tax for the year). The maximum amount of earnings subject to the Social Security tax will increase to $128,400 in 2018, $300 less than $128,700, the amount originally announced. Related figures on page 2 of this Update have been changed to reflect the adjusted amount as indicated by exclamation points.