IRS Retirement Plan Limitations for 2017

Recently, the Internal Revenue Service (IRS) issued the updated retirement plan limitations for 2017. IRS Notice 2016-62 sets forth the 2017 limits to amounts that can be deferred under 401(k) plans, 403(b) and 457(b) plans as well as the catch-up contributions to 401(k), 403(b) and 457(b) plans. The notice also provides the guidelines which determine whether an individual is a, “highly compensated employee,” the maximum amount of compensation that can be taken into account when computing plan contributions under defined benefit and defined contribution plans, and the dollar limitation for determining if someone is a “key employee.” The 2017 Social Security (FICA) taxable wage base issued in a separate announcement and is also addressed below.

Several things remain the same. The amount which can be deferred under 401(k), 403(b) and 457(b) plans remains at $18,000. The catch-up contribution limit for 401(k), 403(b) and 457(b) plans, (for those who are age 50 or older during 2017) will remain at $6,000. The amount for determining if an individual is a “highly compensated employee” (sometimes referred to as an “HCE”) did not increase and remains at $120,000. Therefore, one way in which an employee will be considered to be an HCE in 2017 is if he or she earned more than $120,000 in 2016.

The changes include an increase to the maximum amount of compensation considered when computing plan contributions for defined contribution plans, (i.e. profit sharing plans and 401(k) plans) and accrued benefits in defined benefit pension plans, which both increased to $270,000. The maximum dollar amount which can be contributed to the account of a participant in a defined contribution plan for 2017 increased to $54,000. The maximum benefit payable annually in the form of a straight life annuity from a defined benefit pension plan, if initiated between ages 62 and 65, increased to $215,000.

Also importantly, the dollar limitation for determining if someone is a “key employee” increased from $170,000 to $175,000 for 2017. Identifying “key employees” is also crucial, because: (1) if the present value of accrued benefits of key employees under a defined benefit plan are more than 60% of the accrued benefits of all participants under the plan, or (2) if the account balances of key employees under a defined contribution plan are more than 60% of the account balances of all participants under a defined contribution plan, then the plan is considered to be “top-heavy” and certain minimum benefits or contributions must be provided to non-key employee participants in the plan.  

Finally, the IRS adjusted the Social Security (FICA) taxable wage base from $118,500 to $127,200 for 2017. This amount is important for retirement plans with contribution formulas that are “integrated” with Social Security. The wage base also impacts employees, in that employees who earn more than the base do not pay the Social Security FICA tax on wages which exceed the base amount. However, there is no wage limit to the application of the Medicare (HI) portion of the Social Security tax.

Below, please find a table including all the adjustments for 2017, as compared to the 2016 limits: 

IRS Retirement Plan Limitations for 2017 and 2016.