IRS Announces 2016 Benefit Plan Limit Adjustments

Practical Law Legal Update w-000-7066 (Approx. 8 pages)

IRS Announces 2016 Benefit Plan Limit Adjustments

by Practical Law Employee Benefits & Executive Compensation

Retirement Plan Dollar Limits

In Information Release 2015-118, the IRS announced cost-of-living adjustments affecting dollar limitations for pension plans and other retirement-related items for the 2016 tax year, which generally remain unchanged from the 2015 limits because the increase in the cost-of-living index did not meet the statutory thresholds to trigger their adjustment. For the 2016 tax year:

The elective deferral limit under Section 402(g)(1) of the Internal Revenue Code (Code) for employees who participate in 401(k), 403(b) and most 457 plans will remain unchanged at $18,000.
The catch-up contribution limit for those age 50 and over under Code Section 414(v)(2)(B)(i) (26 U.S.C. § 414(v)(2)(B)(i)) will remain unchanged at $6,000. The catch-up contribution limit for those age 50 and over under Code Section 414(v)(2)(B)(ii) (26 U.S.C. § 414(v)(2)(B)(ii)) will remain unchanged at $3,000.
The limitation on the annual benefit for a defined benefit plan under Code Section 415(b)(1)(A) (26 U.S.C. § 415(b)(1)(A)) will remain unchanged at $210,000.
The limitation on annual additions to a participant's defined contribution plan under Code Section 415(c)(1)(A) (26 U.S.C. § 415(c)(1)(A)) will remain unchanged at $53,000.
The annual compensation limit under Code Section 401(a)(17) (26 U.S.C. § 401(a)(17)) will remain unchanged at $265,000.
The limitation used in the definition of highly compensated employees (HCEs) under Code Section 414(q)(1)(B) (26 U.S.C. § 414(q)(1)(B)) will remain unchanged at $120,000.
The limitation used in the definition of a key employee in a top-heavy plan under Code Section 416(i)(1)(A)(i) (26 U.S.C. § 416(i)(1)(A)(i)) will remain unchanged at $170,000.
The dollar amount under Code Section 409(o)(1)(c)(ii) (26 U.S.C. § 409(o)(1)(c)(ii)) for determining the maximum account balance in an employee stock ownership plan (ESOP) subject to a five-year distribution period will remain unchanged at $1,070,000. The dollar amount used to determine the lengthening of the five-year distribution period will remain unchanged at $210,000.

Information Release 2015-118 provides that the threshold used to determine whether a multiemployer plan is a systematically important plan under Code Section 432(e)(9)(H)(v)(III)(aa) (26 U.S.C. § 432(e)(9)(H)(v)(III)(aa)) will be $1,012,000,000, an increase from 2015's $1,000,000,000 limit.

The IRS also discussed the increases in the adjusted gross income limitation under Code Section 25B(b)(1)(A) (26 U.S.C. § 25B(b)(1)(A)) for determining the retirement savings contribution credit.

The IRS has provided a chart that shows the cost-of-living increases in the dollar limitations on benefits and contributions since 2014.

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 2015-53, the IRS announced cost-of-living adjustments for 2016 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 will remain unchanged at $2,550 (see Practice Note, Cafeteria Plans).
The maximum credit allowed for adoption of a child will be $13,460 (an increase of $60 from 2015). The adoption credit begins to be phased out for individuals with modified adjusted gross income of more than $201,920 (for 2015, this amount is $201,010), and is completely phased out for individuals with modified adjusted gross income of $241,920 or more (for 2015, this amount is $241,010 or more). Both phase-out adjustments are an increase of $910 over their 2015 counterparts (see Practice Note, Fringe Benefits: Adoption Assistance Programs and Fringe Benefits Toolkit).
The maximum amount that can be excluded from an individual's gross income for adoption of a child under an employer's adoption assistance program will be $13,460 (an increase of $60 from 2015). The exclusion begins to be phased out for individuals with modified adjusted gross incomes of more than $201,920 (for 2015, this amount is $201,010), and is completely phased out for individuals with modified adjusted gross incomes of $241,920 or more (for 2015, this amount is $241,010 or more). Both phase-out adjustments are an increase of $910 over their 2015 counterparts (see Practice Note, Fringe Benefits: Adoption Assistance Programs).
The monthly limits for qualified transportation fringe benefits will be as follows:
- the aggregate monthly limit for transit passes and transportation in a commuter highway vehicle will be $130 (unchanged from 2015); and
- the monthly limit an individual can exclude for qualified parking will be $255 (an increase of $5 from 2015) (see Practice Note, Fringe Benefits under Code Section 132: Qualified Transportation Benefits).
Regarding Archer medical savings accounts (Archer MSAs), for 2016 a high-deductible health plan, self-only coverage, is a health plan with an annual deductible that is:
- not less than $2,250 (an increase of $50 from 2015); and
- not more than $3,350 (an increase of $50 from 2015).
Annual out-of-pocket expenses for covered benefits must not be more than $4,450 (unchanged from 2015) (see Practice Note, Defined Contribution Health Plans: Overview: Archer Medical Savings Accounts (Archer MSAs)).
Also regarding Archer MSAs, for 2016 a high-deductible health plan, family coverage, is a health plan with an annual deductible that is:
- not less than $4,450 (unchanged from 2015); and
- not more than $6,700 (an increase of $50 from 2015).
Annual out-of-pocket expenses for covered benefits must not be more than $8,150 (unchanged from 2015).
Under the Affordable Care Act's (ACA's) small business health care tax credit, the maximum credit will be phased out based, in part, on an employer's average annual wages in excess of $25,900 for 2016 (an increase of $100 from 2015) (26 U.S.C. § 45R(d)(3)(B)). The $25,900 amount also will be used in determining who is an eligible small employer for the credit (see Practice Note, Small Business Health Care Tax Credit under the ACA and Affordable Care Act (ACA) Toolkit).

Excess Advance Premium Tax Credits under the ACA

The ACA included a refundable tax credit (known as the premium tax credit) for eligible individuals and families who purchase health insurance through an ACA exchange (see Practice Note, Affordable Care Act (ACA) Overview) (26 U.S.C. § 36B(f)(2)(B)). Taxpayers who meet certain criteria may have some or all of their estimated premium tax credit paid to the insurer in advance. However, if a taxpayer's advance credit payments are more than the actual premium tax credit, the taxpayer owes the excess credit as a tax, subject to the following limits for tax years beginning in 2016:

If household income is less than 200% of the federal poverty line (FPL), the limits are:
- $300 for unmarried individuals (other than surviving spouses and heads of households); and
- $600 for all other taxpayers.
If household income is at least 200%, but less than 300%, of the FPL, the limits are:
- $750 for unmarried individuals (other than surviving spouses and heads of household); and
- $1,500 for all other taxpayers.
If household income is at least 300%, but less than 400%, of the FPL, the limits are:
- $1,275 for unmarried individuals (other than surviving spouses and heads of household) (an increase of $25 over the respective 2015 limit); and
- $2,550 for all other taxpayers (an increase of $50 over the respective 2015 limit).

ACA Information Reporting: Indexing for Affordability Safe Harbors

For ACA information reporting purposes, the IRS has indicated that references (in the instructions to Forms 1095-C and 1094-C (transmittal)) to 9.5% in the affordability safe harbors and elsewhere may change going forward if IRS guidance provides that this percentage is indexed for purposes of applying the affordability thresholds the same way it is indexed under the ACA's premium tax credit. However, this future indexing would not impact information reporting for 2015, see Practice Note, Information Reporting of Health Insurance Coverage by Large Employers (Section 6056). Informally, the IRS has indicated that additional guidance will be provided in this area.

Social Security Wage Base

On October 15, 2015, the Social Security Administration (SSA) announced that the Social Security taxable wage base for 2016 will remain unchanged from 2015 at $118,500.

IRS Announces 2016 Benefit Plan Limit Adjustments | Practical Law