IRS Announces 2014 Benefit Plan Limit Adjustments

Practical Law Legal Update 7-547-7606 (Approx. 5 pages)

IRS Announces 2014 Benefit Plan Limit Adjustments

by Practical Law Employee Benefits & Executive Compensation

Retirement Plan Dollar Limits

In IR-2013-86, the IRS announced cost-of-living adjustments affecting dollar limitations for pension plans and other retirement-related items for the 2014 tax year. Highlights include:

The elective deferral limit under Section 402(g)(1) of the Internal Revenue Code (IRC) for employees who participate in a 401(k), 403(b) and most 457 plans will be $17,500, which also was the limit for the 2013 tax year.
The catch-up contribution limit for those age 50 and over under IRC Section 414(v)(2)(B)(i) remains unchanged at $5,500.
The limitation on the annual benefit for a defined benefit plan under IRC Section 415(b)(1)(A) is increased to $210,000 from $205,000.
The limitation on annual additions to a participant's defined contribution plan under IRC Section 415(c)(1)(A) is increased to $52,000 from $51,000.
The annual compensation limit under IRC Section 401(a)(17) is increased to $260,000 from $255,000.
The limitation used in the definition of highly compensated employees under IRC Section 414(q)(1)(B) remains unchanged at $115,000.

For more information on dollar limits for retirement plans, see Practice Note, Requirements for Qualified Retirement Plans.

Adjustments for Health FSAs, Fringe Benefits and More

In Revenue Procedure 2013-35, the IRS announced cost-of-living adjustments for 2014 affecting health FSAs, certain fringe benefits and more, which include the following:

The annual dollar limit on employee salary reductions for contributions to health FSAs remains unchanged from 2013 at $2,500 (see Practice Note, Cafeteria Plans).
For 2014, the maximum credit allowed for adoption of a child is $13,190 (an increase of $220 from 2013). The adoption credit begins to be phased out for individuals with modified adjusted gross income of more than $197,880 (for 2013, this amount is $194,580), and is completely phased out for individuals with modified adjusted gross income of $237,880 or more (for 2013, this amount is $234,580 or more). Both phase-out adjustments are an increase of $3,300 over their 2013 counterparts (see Practice Note, Fringe Benefits: Adoption Assistance Programs).
For 2014, the amount that can be excluded from an employee's gross income for the adoption of a child under an employer's adoption assistance program is $13,190 (an increase of $220 from 2013). As with the adoption credit, the exclusion begins to phase out for individuals with modified adjusted gross income over $197,880 (for 2013, this amount is $194,580), and is completely phased out for individuals with modified adjusted gross income of $237,880 or more (for 2013, this amount is $234,580 or more). Both phase-out adjustments are an increase of $3,300 over their 2013 counterparts (see Practice Note, Fringe Benefits: Adoption Assistance Programs).
The adjustments for 2014 qualified transportation fringe benefits are as follows:
- the aggregate monthly limit for transit passes and transportation in a commuter highway vehicle is $130 (a decrease of $115 from the 2013 limit ($245)); and
- the monthly limit an individual can exclude for qualified parking is $250 (an increase of $5 from the 2013 limit ($245)) (see Practice Note, Fringe Benefits under IRC Section 132).
Regarding Archer medical savings accounts (Archer MSAs), for 2014 a high-deductible health plan, self-only coverage, is a health plan with an annual deductible that is:
- not less than $2,200 (up from $2,150 for 2013); and
- not more than $3,250 (up from $3,200 for 2013).
Annual out-of-pocket expenses for covered benefits must not be more than $4,350 (up from $4,300 for 2013) (see Practice Note, Defined Contribution Health Plans).
Also regarding Archer MSAs, for 2014 a high-deductible health plan, family coverage, is a health plan with an annual deductible that is:
- not less than $4,350 (up from $4,300 in 2013); and
- not more than $6,550 (up from $6,450 in 2013).
Annual out-of-pocket expenses for covered benefits must not be more than $8,000 (up from $7,850 in 2013).

Small Business Health Care Tax Credit

The ACA added a tax credit for certain small employers that make nonelective contributions to their employees' health insurance premiums (see Practice Note, Small Business Health Care Tax Credit under the ACA). The maximum credit is:

A percentage of the premiums the employer paid during the year for employer-provided health insurance coverage.
Phased out based on the employer's:
- number of full-time equivalent employees that is more than ten; and
- average annual wages exceeding a statutory dollar amount.

For tax years beginning after 2013, the statutory dollar amount is subject to an inflation adjustment. For 2014, the dollar amount is $25,400 (up from $25,000 for 2013). The amount will be used to:

Limit the small employer health insurance credit.
Determine who is an eligible small employer for purposes of the credit.

Social Security Wage Base

In addition, the Social Security Administration (SSA) announced that the Social Security taxable wage base for 2014 will increase to $117,000 (from $113,700 for 2013).

IRS Announces 2014 Benefit Plan Limit Adjustments | Practical Law