The IRS recently announced the retirement plan limits for 2015, which includes the maximum contribution amounts and other limitations that apply to employer-sponsored retirement plans (employer plans).
In many cases, these create opportunities for your small business clients to contribute more to their retirement savings accounts. However, these benefits can be negated if the applicable rules are not followed. The following are some general guidelines that can be used to help your clients stay within the applicable limits.
$53,000 annual addition: Double-up opportunities for clients who work two jobs (with caution)
The annual addition limit for 2015 has been increased to $53,000. This limit applies to defined contribution plans, including 401(k) plans, SEP IRAs, profit-sharing plans, and 403(b) plans. Both employer contributions and salary deferral contributions are counted when determining whether contributions have reached this limit for an individual.
While many small business owners understand that this limit applies to one employer plan, some are unsure of how it applies to individuals who participate in multiple employer plans. Some either contribute too much or miss out on opportunities to make additional contributions.
If you have clients who participate in multiple retirement plans, the controlled group and affiliated service group (ASG) should be used to determine whether any such client can contribute the maximum amount to each retirement plan.
Example
- John works for ABC Corporation and receives $53,000 in contributions to the ABC Corporation’s 401(k) plan.
- John also runs a successful consulting business and pays himself an annual salary of $250,000 from the business.
- There is no common ownership between the two businesses and no affiliated relationship.
- If John establishes a 401(k), SEP IRA, or profit-sharing plan for his consulting business, he can contribute up to $53,000 to his account under that plan.
- John’s contribution for the year could be up to $106,000, compensation allowing.
- If John will be at least age 50 by the end of the year, he can contribute an additional $6,000 in catch-up contributions if the plan is a 401(k) plan (but see salary deferral limits below).
On the other hand, if John has ownership in two businesses and wants to contribute $53,000 to a retirement plan established for each business, it must first be determined if both businesses are part of a controlled group of companies or an ASG. In that case, both businesses are then likely treated as one for retirement plan purposes. If the businesses are not part of a controlled group or ASG, then John can contribute the maximum amount under each plan.
Note: The controlled group and ASG rules are highly complex and beyond the scope of this article. Clients should consult with an ERISA attorney for assistance with determining controlled group and ASG status.
Don’t forget the 25% cap
The maximum deductible contribution amount for the year is 25% of compensation. As a result, employer contributions to retirement plans such as small business owner 401(k) (SBO-K) plans, profit-sharing plans, and SEP IRAs are limited to the lesser of 25% of compensation or $53,000.
This means that if a participant’s compensation for the year is $50,000, the maximum employer contribution amount that can be contributed to that individual’s account under an SBO-K, SEP IRA, or profit-sharing plan is $12,500. Under an SBO-K plan, additional salary deferral contributions can be made up to $18,000, plus catch-up contributions of $6,000 if eligible.
$18,000 salary deferral limit plus $6,000 catch-up is aggregated
The salary deferral contribution limit for 2015 has increased to $18,000, plus an additional catch-up contribution of $6,000 for participants who are at least age 50 by the end of the year.
This limit applies on a “per-individual” basis. As a result, this is the maximum amount that can be contributed for the year by an individual, regardless of the number of plans in which he participates.
Exceptions to 457 plans
For this purpose, 457 plans are not included. As such, if an individual participates in a 401(k) and/or 403(b) and a 457(b) plan, she can make salary deferral contributions of up to $18,000 to the 401(k)/403(b) plan, and still make salary deferral contributions of up to $18,000 to the 457(b) plan.
If eligible, catch-up contributions of up to $6,000 can be made to each. This means that for someone who participates in a 457(b) plan and a 401(k)/403(b) plan, the total salary deferral contributions for the year can be up to $36,000, plus up to $12,000 in catch up contributions for those who are at last age 50 by the end of the year.
$12,500 plus $3,000 catch-up for SIMPLE IRAs
The salary deferral limit for SIMPLE IRAs has been increased to $12,500, plus an additional $3,000 catch-up contribution for participants who are at least age 50 by the end of the year.
When determining whether an individual has reached his/her salary deferral limit of $18,000, salary deferral contributions made to SIMPLE IRAs are taken into consideration.
$265,000 compensation cap must be used for calculating contributions
The compensation cap has been increased to $265,000. This is the maximum amount that can be taken into consideration when calculating plan contributions.
For example, assume Sue establishes a profit-sharing plan for her business. Assume too that the contribution to the plan for the year will be 10% of compensation.
If Sue pays herself W-2 wages of $300,000 for the year, the maximum amount of contribution she can receive under the plan is $26,500. While 10% of $300,000 is $30,000, the maximum amount of Sue’s compensation that can be considered when calculating her contribution is $265,000.
$600 minimum SEP IRA eligibility
The minimum eligibility compensation for SEP IRAs has been increased to $600.
An employee who meets the other eligibility requirements must be covered under a business’s SEP IRA if he receives $600 or more in compensation from the business for the year.
Keeping within limits is only part of the equation
Ensuring that contributions do not exceed statutory limits is only one of the compliance requirements for employer plans. If a client’s retirement plan covers common-law employees, testing may be required to ensure compliance. This includes performing tests to ensure that contributions do not discriminate in favor of highly compensated employees. In some cases, it may be necessary to engage the services of a third-party administrator, who would be responsible for ensuring that all compliance requirements are satisfied.
Maier & Associates Financial Group is here to help!
At Maier & Associates, we are committed to helping you manage your finances as you strive to achieve your financial goals today, tomorrow, and many years down the road. Your financial success is important to us, which is why we create a wealth management strategy designed to meet your personal financial goals and dreams. Visit our website at http://maierandassociates.com/ or simply give us a call at (800) 282-4503.
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