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Certain IRS Dollar Limits and Social Security Figures Will Increase for 2018; PBGC Guarantee Expected to Increase

This Update reports indexed Internal Revenue Service (IRS) and Social Security figures for 2018 that are of interest to retirement plan sponsors. It also includes the 2018 Pension Benefit Guaranty Corporation (PBGC) premium rates and the maximum guarantee. There is a separate Update for sponsors of multiemployer plans and staff plans that have opted to be covered by the rules for multiemployer plans.

IRS Retirement Plan Limits

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 2018 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) and §457(b) Deferral Limit 18,000 18,500
Annual §401(k) Catch-Up Limit (Age 50 and Older) 6,000 Unchanged
Maximum §401(a)(17) Annual Compensation Amount Considered for
Qualified Plans
270,000 275,000
Annual §414(q) Compensation Threshold to Identify Highly
Compensated Employees
120,000 Unchanged
Annual §416 Top-Heavy Compensation Threshold to Identify
Key Employees
175,000 Unchanged
Cost-of-Living Adjustment (COLA) Factor for the §415(b) 100%-of-Pay Limit 1.12%2 1.97%3

1 There are late-retirement adjustments for benefits starting after age 65.

2 The 2017 factor was for participants who separated from service before 1/1/17.

3 The 2018 factor is for participants who separate from service before 1/1/18. This factor reflects an adjustment (announced by the IRS on October 27, 2017) to the 1.96% 2018 COLA factor that the IRS announced on October 19, 2017.

Social Security Benefits

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 $128,700
COLA Increase 0.3% 2.0%
Social Security National Average Wage Index2 $48,098.63
(for 2015)
$48,664.73
(for 2016)
Primary Insurance Amount (PIA) Formula:3
a) First Bend Point
b) Second Bend Point

$885
$5,336

$896
$5,399
Maximum Social Security Benefit at Social Security Normal Retirement Age (SSNRA)4 $2,687/Month $2,788/Month
Early Retirement Earnings Test Prior to Year of Attaining SSNRA
(Amount that Can Be Earned before Benefits Are Cut)
5
$16,920/Year $17,040/Year

1 All earnings are subject to the Medicare tax

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.

PBGC Premiums and Guarantee Limit

The flat-rate, per-participant premium for single-employer plans will be $74 for 2018, up from $69 for 2017. The variable-rate premium (VRP) per $1,000 of unfunded vested benefits in single-employer plans will be $38 for 2018, up from $33 for 2017.The per-participant cap on the VRP will increase to $523 for 2018, up from $517 for 2017.*

The single-life annuity maximum guarantee for participants age 65 in single-employer pension plans that terminate during 2018 will be $5,420.45 per month ($65,045.40 annually) for 2018, up from $5,369.32 per month ($64,431.84 annually) for 2017.**

Questions?

For more information about how these new rules may affect your plan, please contact your Segal consultant or the Segal office nearest you.

 

* See the PBGC’s Premium Rates webpage.

** See the PBGC’s monthly maximum guarantee webpage. The PBGC’s multiemployer guarantee will not change because it is not indexed. There is no dollar limit on the monthly benefit payable under the multiemployer program, only a limit on the benefit rate used to calculate the monthly benefit. The maximum monthly PBGC guarantee is $35.75 per year of service, which means a participant with 30 years of service would receive, at most, a benefit of $1,072.50 per month. For additional information, see the multiemployer benefit guarantees page of the PBGC’s website.

 

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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Retirement
Compliance
News Highlights:

 

  • Certain IRS retirement plan limits will increase for 2018. 
  • Social Security benefits will increase 2 percent for 2018. 
  • The wage base for Social Security tax will increase by 1.18 percent. 
  • The PBGC’s variable-rate premium will not increase, but the guarantee will increase