New Dollar Limits for 1998
On October 22, 1997, the IRS announced the new cost-of-living-adjusted dollar limits that will apply to qualified retirement plans for 1998 plan years. Here are the 1998 limits that apply to most employer plans:
Pre-tax deferrals. For the 1998 calendar year, the maximum pre-tax contributions that may be made to 401(k) plans by an individual will increase from $9,500 to $10,000.
Compensation-based accrual limit. Code section 401(a)(17) limits the amount of annual compensation on which a plan may base contributions or accruals. For 1998 plan years, the 401(a)(17) limit will remain unchanged at $160,000. This dollar limitation also applies to limit the compensation upon which the employer may take a deduction for contributions to qualified retirement plans.
Highly compensated employee threshold. The dollar limit that is used in the Code section 414(q) definition of the term "highly compensated employee" will stay the same for 1998 plan years: $80,000.
Section 415. For section 415 limitation years beginning in 1998, the maximum defined benefit pension plan accrued annual benefit will increase from $125,000 to $130,000. There will be no increase in the defined contribution plan limits. They will continue to limit total annual additions to 25% of compensation or $30,000, whichever is less.
Excess distributions and accumulations. The excess distributions and excess accumulations excise taxes have been repealed for lifetime distributions received after 1996 and deaths after 1996. Therefore, there are no further adjustments in the dollar thresholds that applied to determine when these taxes would be payable.
Here are some other limits that are used in special situations:
ESOP distribution period. Code section 409(o)(1)(C) imposes a maximum time limit for distributing a participant's ESOP account balance when a distribution is elected. As a general rule, the maximum distribution period is five years. But for participants with large balances, the maximum distribution period may be between five years and 10 years. For 1998, a participant with a balance greater than $725,000 (up from $710,000) must have that balance distributed over a maximum period of five years plus one year for each $145,000 (up from $140,000) or fraction thereof by which the balance exceeds $725,000.
Compensation-based accrual limit for certain governmental plans. Governmental plans in effect on July 1, 1993 are permitted to use transition rules for compliance with the Code section 401(a)(17) limit. If the transition rules apply, the plan's 1998 compensation limit is $265,000.
457 plans. The generally-applicable maximum pre-tax contribution an individual may make to a 457 plan has been increased from $7,500 to $8,000 for 1998.
SEPs. A SEP must cover employees who meet certain age and service criteria and receive at least a minimum dollar amount of compensation. That compensation threshold remains unchanged for 1998 at $400. The compensation-based accrual limit for SEPs also remains unchanged at $160,000.
SIMPLE plans. The maximum employee pre-tax contribution to a SIMPLE plan remains unchanged at $6,000.