American Administration Services Company
2004 Plan Limitations
IRS Announces Pension Plan Limitations for 2004 in IR-2003-122, Oct.16, 2003: Cost‑of‑living adjustments applicable to dollar limitations for pension plans and other items for Tax Year 2004
Section 415 of the Internal Revenue Code provides for dollar limitations on benefits and contributions under qualified retirement plans. It also requires that the Commissioner annually adjust these limits for cost‑of‑living increases.
Many of the pension plan limitations will change for 2004. For most of the limitations, the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. Furthermore, several limitations, set by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), are scheduled to increase at the beginning of 2004.
For example, under EGTRRA, the limitation under section 402(g)(1) on the exclusion for elective deferrals described in section 402(g)(3) is increased from $12,000 to $13,000. This limitation affects elective deferrals to section 401(k) plans and to the Federal Government’s Thrift Savings Plan, among other plans.
Cost-of-Living limits for 2004
Effective January 1, 2004, the limitation on the annual benefit under a defined benefit plan under section 415(b)(1)(A) is increased from $160,000 to $165,000. For participants who separated from service before January 1, 2004, the limitation for defined benefit plans under section 415(b)(1)(B) is computed by multiplying the participant's compensation limitation, as adjusted through 2003, by 1.0220.
The limitation for defined contribution plans under section 415(c)(1)(A) is increased from $40,000 to $41,000.
The Code provides that various other dollar amounts are to be adjusted at the same time and in the same manner as the dollar limitation of section 415(b)(1)(A). These dollar amounts and the adjusted amounts are as follows:
The annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) is increased from $200,000 to $205,000.
The dollar limitation under Section 416(i)(1)(A)(i) concerning the definition of key employee in a top-heavy plan remains unchanged at $130,000. The dollar amount under Section 409(o)(1)(C)(ii) for determining the maximum account balance in an employee stock ownership plan subject to a 5‑year distribution period is increased from $810,000 to $830,000, while the dollar amount used to determine the lengthening of the 5‑year distribution period is increased from $160,000 to $165,000.
The limitation used in the definition of highly compensated employee under Section 414(q)(1)(B) remains unchanged at $90,000.
The annual compensation limitation under Section 401(a)(17) for eligible participants in certain governmental plans that, under the plan as in effect on July 1, 1993, allowed cost‑of‑living adjustments to the compensation limitation under the plan under Section 401(a)(17) to be taken into account, is increased from $300,000 to $305,000.
The compensation amount under Section 408(k)(2)(C) regarding simplified employee pensions (SEPs) remains unchanged at $450.
The compensation amounts under Section 1.61‑21(f)(5)(i) of the Income Tax Regulations concerning the definition of “control employee” for fringe benefit valuation purposes remains unchanged at $80,000. The compensation amount under Section 1.61‑21(f)(5)(iii) is increased from $160,000 to $165,000.
Limitations specified by statute
The Code, as amended by the Economic Growth and Tax Relief Act of 2001 (EGTRRA), specifies the applicable dollar amount for a particular year for certain limitations. These applicable dollar amounts are as follows:
The limitation under Section 402(g)(1) on the exclusion for elective deferrals described in Section 402(g)(3) is increased from $12,000 to $13,000.
The limitation under Section 408(p)(2)(E) regarding SIMPLE retirement accounts is increased from $8,000 to $9,000.
The limitation on deferrals under Section 457(e)(15) concerning deferred compensation plans of state and local governments and tax-exempt organizations is increased from $12,000 to $13,000.
The dollar limitation under Section 414(v)(2)(B)(i) for catch-up contributions to an applicable employer plan other than a plan described in Section 401(k)(11) or 408 (p) for individuals aged 50 or over is increased from $2,000 to $3,000. The dollar limitation under Section 414(v)(2)(B)(ii) for catch-up contributions to an applicable employer plan described in Section 401(k)(11) or 408 (p) for individuals aged 50 or over is increased from $1,000 to $1,500.
2004 limits for Welfare Plans
The IRS has set new limits applicable to welfare benefit plans for 2004, including transportation benefits, key employees, highly compensated employees and control employees.
Transportation Benefits - The defined benefit limit under Code Section 415(b)(1)(A) for 2004 will increase to $165,000 from the 2002 and 2003 level of $160,000. The limit on annual additions under Section 415©(1)(A) for 2004 will increase to $41,000 from the 2003 and 2002 level of $40,000. These limits can be used to calculate the amount of transportation benefits that control employees can receive without being subject to income tax.
Compensation Limits - The following limits are used for testing for nondiscrimination in welfare benefit plans:
Taxable Wage Base for Social Security Tax - The Social Security taxable wage base will increase 2.1 percent in 2004, rising to $87,900 from its 2003 level of $87,000. The taxable wage base caps the amount of employee compensation subject to the 6.2-percent Social Security tax rate imposed on both employers and employees. In 2004, employers must withhold Social Security taxes on each employee’s first $87,900 of compensation. This means that the employer and employee must pay $5,449.80 each. Compensation above the $87,900 limit is not subject to Social Security taxes. Unlike the Social Security tax rate, the 1.45-percent Medicare tax rate imposed on both employers and employees applies to all of an employee’s compensation, without a wage base cap. Together, the Social Security and Medicare taxes form the 7.65-percent Federal Insurance Contributions Act (FICA) payroll tax on wages (15.3 percent when the employer’s and employee’s percentages are combined).
NOTE: Administrators of defined benefit or defined contribution plans that have received favorable determination letters should not request new determination letters solely because of yearly amendments to adjust maximum limitations in the plans.
Employers should amend retirement plans to implement the limits available under EGTRRA. For a plan that incorporates the relevant tax code sections by reference (i.e., containing language referring to the tax code sections), these increases automatically take effect. Plan sponsors should immediately make systems changes to accommodate the increased limits. Communications materials that specify the various plan limits should be reviewed for accuracy and revised, if needed, before they are distributed to plan participants.
Other 2004 rates: IRS Issues High-Low Per Diem Rates of $207 and $126 in Revenue Procedure 2003-80 on 10/21/03. The deemed meals and incidental expenses (M&IE) high-low rates are $46 and $36, slightly above the 2003 level of $45 and $35. The high-low rates are an alternative to the continental U.S. (CONUS) rates the General Services Administration (GSA) sets annually for the reimbursement of federal employees' business travel-related expenses. Like the CONUS rates, the high-low rates include allowances for lodging as well as M&IE. Unlike the CONUS rates, the high-low rates provide only two rates - one for high-rate locations, and one for low-rate locations – not rates for individual locations in the United States. Employers generally use the high-low rates only when they provide advances or reimbursements to employees for both lodging and M&IE. Employers that provide reimbursements only for M&IE cannot use the high-low rates and must use the CONUS rates.