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.