As individuals and companies plan for 2015, certain tax issues must be considered in personal and business financial planning. Here is a summary of changes to benefit plan contributions.
New Rules and Increased Limits
Withholding Rules. Income subject to FICA payroll tax has changed for 2015. The maximum amount of earnings subject to the Social Security tax is now $118,500, up from $117,000. According to the Social Security Administration, about 10 million workers will pay higher taxes. However, actual withholding amounts remain unchanged at 6.2 percent, for both employees and employers, up to the taxable maximum.
Patient Protection and Affordable Care Act. This law allows small employers to continue to offer their current health plans to employees through December 31, 2015. In February 2014, the Internal Revenue Service issued regulations clarifying that real estate sales agents are not treated as employees for purposes of the Affordable Care Act. Therefore, many real estate brokerage offices may never reach the number of employees required to trigger ACA employer obligations.
For individuals with health flexible spending accounts, the maximum contribution has been increased to $2,550.
401(k) Contribution Limits. When the IRS announced its 2015 adjustments, it noted that many plan limits will have a cost-of-living adjustment bump-up based on the U.S. consumer price index.
401(k), 403(b), and profit-sharing plan elective deferrals rose from $17,500 to $18,000. For employees age 50 and over, the catch-up contribution limit rose from $5,500 to $6,000. The catch-up limit applies to those turning 50 at any time during the year.
Employer and employee defined contribution limits rose from $52,000 to $53,000. Again, for those age 50 and over, the limit increased from $57,500 to $59,000. This effectively means that an employee 50 years or older can defer a total of $24,000 and the employer, through an employer match and profit-sharing, can contribute up to $35,000.
The employee annual compensation limit for calculating contributions has also risen from $260,000 to $265,000.
The limit used in the definition of a highly compensated employee for the purpose of 401(k) nondiscrimination testing to determine if all contributions can remain intact or whether some need to be returned because the plan favors highly compensated individuals has also increased from $115,000 to $120,000. The compensation of “key employees” in a top-heavy plan has remained unchanged at $170,000.
Defined Benefit Plans. Significantly fewer employers maintain defined benefit plans, but for those who do, the maximum annual benefit that may be funded remains at $210,000. For an employee who separated from service before Jan. 1, 2015, the limit for defined benefit plans is computed by multiplying the participant’s compensation limit, as adjusted through 2014, by 1.0178, an increase from the prior year.
SIMPLE Plans. Savings incentive match plans, or SIMPLE, retirement accounts are for employees of small companies. The maximum contribution limit has increased from $12,000 to $12,500 and those age 50 and over are allowed catch-up contributions of $3,000.
SEP Plans. Simplified employee pensions, or SEP, plans provide small business owners with a broad range of compensation limits and allow high earners to contribute a significant amount to retirement accounts. The minimum compensation amount has been increased to $600 for 2015 and the maximum compensation limit has been adjusted upward to $265,000.
Employee Stock Ownership Plans. Although the dollar amount used to determine the lengthening of the five-year distribution period remains unchanged at $210,000, the maximum account balance in the plan subject to a five-year distribution period has been increased to $1,070,000.
Individual Retirement Accounts. The limit on annual IRA contributions remains at $5,500 with a catch-up contribution for those age 50 and over at $1,000.
Traditional IRAs. The deductions for taxpayers making contributions to a traditional IRA is phased out for singles and heads of households who are covered by a workplace retirement plan if they have modified adjusted gross incomes from $61,000 to $71,000. For married couples filing jointly in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the AGI phase out is from $98,000 to $118,000.
For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is, the deduction has been phased out when the AGI is from $183,000 to $193,000.
For a married person filing a separate return who is covered by a workplace retirement plan, the phase-in range is $0 to $10,000.
Roth IRAs. The AGI phase-out range for taxpayers making contributions to Roth IRAs is from $116,000 to $131,000 for singles and heads of households, and $183,000 to $193,000 for married couples filing jointly. For a married person filing a separate return, the phase-in range is $0 to $10,000.
Saver’s Credit. This is the retirement savings contributions credit for low and moderate income workers and is available along with other tax savings that may apply. The AGI limit has been increased to $61,000 for married couples filing jointly, $45,750 for heads of households, and $30,500 for singles and married couples filing separately. The saver’s credit helps offset part of the initial contribution workers voluntarily make to 401(k) plans, similar retirement plans, or IRAs. The amount of the credit is 50 percent, 20 percent, or 10 percent of the annual retirement plan or IRA contribution, up to $2,000 for singles and heads of households and $4,000 for married couples filing jointly. The amount of the credit depends on the participant’s AGI.
The above summary is not exhaustive and there may be other tax law changes that impact you or your business. Always consult with a tax professional with specific questions since the laws and implementing regulations are subject to change.