Will Uncle Sam squeeze retirement contributions? What Benefits pros need to know
September 30, 2009 by Christian SchappelPosted in: Money, Pay and benefits, Special Report - Benefits
Those trying to boost their retirement savings can’t seem to catch a break. First the market freefalls, and now Uncle Sam may put the squeeze on how much you’re allowed to contribute.
Lower 2009 inflation is likely to require employers to make changes in next year’s 401(k) plans, according to a report released by Mercer.
On Oct. 15 the Internal Revenue Service (IRS) is expected to announce changes required to 2010 retirement plan contributions.
Changes may include:
- A $500 cut in the maximum amount employees can contribute, and
- A $5,000 slice off the maximum income eligible for an employer contribution.
The limits for defined-contribution and defined-benefit plans — including the amount employees can sock away in 401(k)s — are adjusted each year using a formula based on inflation. And as a result of negative inflation this year, 401(k) contribution limits for 2010 may not get a cost-of-living increase.
Although it’s not entirely clear whether the IRS would actually go through with lowering contribution limits based on the formula, should it do so, this would be the first time limits have been adjusted downward.
Currently, employees can contribute up to $16,500 in their 401(k)s on a pre-tax basis or $22,000 if they’re 50 or older. But that amount could be reduced by $500, down to $16,000.
What employers will have to do
If lower contribution limits are set, plan sponsors will need to alter forms and warn workers to cut back if they will max out.
Workers will also have to be notified if lower limits affect benefit accruals in pension plans.
2 ways to ease the pain
Should lower limits get established, some employees are bound to be upset.
Two ways to ease the blow:
- Check whether your 401(k) plan allows after-tax contributions, or
- Encourage employees to set money aside in an IRA, or some other tax-efficient investment.
Tags: 2009 inflation, 401(k), defined-benefit plans, defined-contribution, internal revenue service, IRA, IRS, Mercer, pension plans, retirement plan contributions
October 1st, 2009 at 2:27 pm
This is ridiculous. Social Security is running out of money, so by all means, let’s make more people dependent on it by cutting how much they can put in their retirement accounts. Sometimes I seriously wonder if anyone in Washington has a brain!
October 1st, 2009 at 2:36 pm
Janice:
It may well be ridiculous. However, keep in mind most of these things are embedded in legislation passed sometime previously. It is not that easy to say ‘we’re going to wave this’ when the law defines what needs to be done. With the other critical issues before Congress, they are probably not that interested in $500 in a retirement plan. The bright side is there will definitely be inflation within 24 months so what is lost can be made up quickly with the advent of said inflation. Not sure that is really a bright side, though.
October 1st, 2009 at 3:51 pm
Where is the surprise, next the Dems are coming after the medical contributions. Stay tuned.
October 1st, 2009 at 7:06 pm
None of our employees can afford to put the maximum in anyway. Do you get a lot of people who max out?
October 2nd, 2009 at 6:45 am
I work for doctors – they all max out, but that is not the point. We ask people to take personal responsibility for their retirement and yet, I have an 18 year old employee who can’t participate in our 401K (although he could fight in Iraq) and now I have to tell the doctors that their contributions for their 401K will be LOWER for 2010. How is this allowing people to take personal responsibility? And truly, no Dave, inflation coming in 24 months to make up the difference does not comfort me. We have to stop handicapping people who are trying to step up to the plate. That’s all I’m saying
October 2nd, 2009 at 8:22 am
Is there still pending legislation from Congressman George Miller of California where the government will convert (the language used in the bill says “confiscate” – but no one reads the bills anyway as we all know) your 401K to a public pension fund returning a fixed rate…
Should we still contribute at all? Another money pool to tap and support free health care?
October 2nd, 2009 at 9:54 am
Janice,
It is up to the employer as to what age limit is placed on the 401k plan. We amended our 401k plan in 2000 to include employees age 18 & over so they could participate in the plan. You may want to speak with your plan administrator to see about having it amended to include employees 18 yrs & older who otherwise would be eligible to participate based on other eligibility criteria.