Elective contribution limits & 2012 changes

There are many types of limits for the many types of retirement plans. When combining employee contributions, employer matching funds and the opportunity for employer profit-sharing to go into retirement accounts, the limit under section 415 of the IRS code must be carefully watched.

As we approach year end, now is a good time to make sure that you are on track to be compliant with the Tax Year 2012 contribution limit for defined contribution plans, which is $50,000 total. Components of the $50,000 limit may include:

–          Elective deferral limit for employees of $17,000 for 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan.

–          Catch-up contribution limit for age 50+ of $5,500.

–          Employer matches and/or profit-sharing contributions.

If you are over the limit, or it appears that you will be over the limit at year end, then you need to take corrective or preemptive measures to not exceed the $50,000 limit. If correcting an over-payment, the employer needs to report the correction on Form 1099-R and do the following:

  1. Distribute unmatched elective contributions (adjusted for earnings) to the participant. (Early distribution penalty of 10% does not apply)
  2. If there are matched funds, forfeit the matched funds by placing them into an unallocated account.
  3. Forfeit profit-sharing contributions. (Alternate payment arrangements will need to be made with the employee.)

A few other selected 2012 changes to note:

–          A highly compensated employee is defined as compensation of $115,000 or more (a $5,000 increase).

–          IRA contribution deductions are being phased-out for IRA contributions for workers who are covered by a workplace retirement plan and for Roth IRA contributions.

For deduction phase-out income rules and more information about 2012 limitations and changes, go to http://www.irs.gov/uac/IRS-Announces-Pension-Plan-Limitations-for-2012 .