TIPS: 2015 Cost-of-Living Adjustments for Qualified Retirement Plans

The Internal Revenue Service has announced the 2016 plan year cost-of-living adjustments for the dollar limitations on benefits, contributions, compensation and other items relating to qualified retirement plans. For 2016, the limits listed below have remained the same as 2015.

MAXIMUM DOLLAR LIMITS

* Keep in mind that when determining any employer contribution the annual compensation limit must be taken into consideration as employer contributions may only be allocated up to this limit ($265,000 in 2016). For example, a Safe Harbor 4% Match contribution in 2016 would be $10,600 based on $265,000 in compensation. Please make sure that you indicate this in your payroll system, if you are calculating an employer contribution, or make your Payroll Company aware of this limit.

** An employee must earn more than $120,000 in 2015 to be highly compensated in 2016 and must earn more than $120,000 in 2016 to be highly compensated for 2017 plan year testing.

*** An employee who is an officer and has annual compensation greater than $170,000 (indexed for 2016) will be a Key Employee.

In addition, the Social Security Taxable Wage Base has remained the same in 2016 at $118,500. For Plans that use an integrated profit sharing formula, we will be using this amount in the calculation of your employer profit sharing contribution. The Taxable Wage Base for 2015 was $118,500.

Timing of Employee Contributions

As a reminder, the Department of Labor ("DOL") aggressively investigates employee allegations of late deposits. They do not have materiality thresholds and they follow up on employee complaints.

The DOL has strict regulations regarding the time frame in which elective deferral contributions and loan repayments must be deposited by an Employer to a qualified plan. Both the Internal Revenue Service ("IRS"), upon Plan audit, and DOL insist that deferrals and loan payments must be segregated from the general assets as soon as administratively possible. The IRS and DOL normally consider this to be within three (3) to five (5) business days**** of being withheld from employee paychecks. Deposits to the Plan must be made consistently and as early as possible each and every time that elective deferral contributions are withheld from paychecks. If participants are paid on a bi-weekly basis, 401(k) deferrals and loan payments should be processed on a bi-weekly basis. Monthly deposits are not acceptable and are not considered timely if your payroll cycle is more frequent than monthly.

**** In January, 2010, the DOL issued final Regulations regarding the timing of deposits and have indicated that 7 business days is acceptable for plans with less than 100 participants. A participant is defined as an employee or former employee who is covered by the plan. This includes active employees regardless of whether they are actively contributing to the plan and terminated employees with account balances.

The annual IRS Form 5500 and Form 5500-SF include a question that asks “Did the employer fail to transmit to the plan any participant contributions within the time period described in 29CFR 2510.3-102?” This Labor regulation sets the time frame under which employee contributions must be deposited once deducted from paychecks in order to be considered plan assets.  All Plan Sponsors must comply with this regulation, since it is a focus of the DOL and IRS.  Plans that require an annual independent audit generally have an intensive review of the timeliness of employee deferrals and loan repayments.  It is important that you answer the question in regards to late deposits on our plan year end Annual Questionnaire accurately, so we can assist you in correcting the failure timely and according to DOL regulations.