Annual Cost-Of-Living Adjustments: 1997


On October 24, 1996, the Internal Revenue Service announced the annual cost-of-living adjustments ("COLAs") for certain limits which affect the administration of tax-qualified retirement plans, including 401(k) plans, and certain other types of employee benefit plans. These adjustments are effective as of January 1, 1997. Because of rounding rules now in effect, certain of the limits subject to COLAs did not change from 1996.

The following table set forth the 1997 COLAs:

Provision1997 Limits
Maximum 401(k) Contributions* $9,500
Maximum SIMPLE Employee Elective Contributions$6,000
Maximum Compensation Limit $160,000
Highly Compensated Employees
Earning (in previous year) more than
$80,000
Annual Benefit for Defined Benefit Plans $125,000
ESOPs---Lengthen five-year distribution period for account balances in excess of $710,000
Simplified Employee Pension Plans (SEPs)---
Contributions must be made for employees earning at least
* $400
Threshold Amount for Excess Distributions Excise Tax
Regular annual limit ** $160,000
Qualifying lump sums $800,000

* Amount unchanged from 1996 limit.
**Excise tax on excess distributions is suspended for 1997, 1998 and 1999.

Things to Remember:

A new, simplified method of identifying highly compensated employees goes into effect in 1997. Highly compensated employees will include (i) any 5% owner in 1997 or 1996; and (ii) any employee who earned more than $80,000 in 1996 (the previous year). In addition, in determining the employees who are highly compensated based on previous year compensation, the employer also can elect to treat as highly compensated only the top 20% of employees.

Federal truth-in-lending laws generally apply to loans made by a retirement plan to its participants if the plan makes more than 25 participant loans (or makes more than 5 loans secured by the participant.s principal residence) in either the prior calendar year or in the current calendar year.

The Social Security (OASDI) taxable wage base, which governs the amount of pay subject to Social Security tax withholding and affects plans that are "integrated" with Social Security, also is adjusted annually. For 1997, the wage base has been increased to $65,400. The medicare tax, however, applies to all wages without limit.