IRS Announces 2001 Cost of Living Adjustments for Benefit Plans

The IRS recently announced the cost-of-living adjustments effective January 1, 2001 for the various dollar limits applicable to retirement plans. The 2001 dollar limits are:

  • 401-K Plans: The annual limit on before-tax elective deferrals remains at $10,500. Remember that this limit applies to the participant’s tax year, which most likely is the calendar year.

  • Defined Benefit Plans: The maximum annual benefit that can be accrued at age 65 under a defined benefit plan has increased from $135,000 to $140,000.

  • Defined Contribution Plans (profit sharing, money purchase, etc.): The maximum annual contribution is increased from $30,000 to $35,000 for the 2001 limitation year.

  • 403-B Tax Sheltered Annuities and Custodial Accounts: The limit on salary reduction contributions remains at $10,500. The dollar limits under any of the alternative elections also remain the same.

  • Eligible 457 Plans: The limit on deferrals under eligible 457 deferred compensation plans of state and local governments and tax-exempt organizations is increased from $8,000 to $8,500 in 2001.

  • Highly Compensated Employees: The threshold for determining who is a “highly compensated employee” for purposes of various limits on benefits under retirement plans remains at $85,000 for 2001.

    Keep in mind that the determination of who is “highly compensated” involves looking at compensation during the previous plan year. When you are deciding if someone is “highly compensated” for 2001, you look at the compensation for the 2000 plan year and determine whether that amount exceeds $85,000. When you are deciding if someone is “highly compensated” for 2002, you look at the compensation for the 2001 plan year and determine whether that amount exceeds $85,000.

  • Compensation Limit: The limit on the compensation used for determining benefits for all qualified retirement plans and tax sheltered annuities or custodial accounts remains at $170,000 for plan years beginning in 2001.

  • Integration Level: The maximum amount of pay considered FICA wages, which is the maximum “integration level” for plans using “permitted disparity,” is increased from $76,200 to $80,400 for 2001.

The IRS announcement also covers several other dollar limits of more limited application. Those limits affect such things as simplified employee pension programs, simple retirement accounts and ESOPs.