The IRS has announced the following cost-of-living adjustments affecting dollar limitations for pension plans and other retirement-related items for the 2018 tax year.
• Elective deferrals. The limitation on the exclusion for elective deferrals under Code Sec. 402(g) (3) will increase from $18,000 to $18,500 in 2018. This limitation affects elective deferrals to various plans, including Code Sec. 401(k) plans, Code Sec. 403(b) annuities, SEPs, and the federal government’s thrift savings plan.
• Defined benefit plans. The limitation on the annual benefit under a defined benefit plan will increase from $215,000 to $220,000 in 2018. For participants who separated from service before Jan. 1, 2018, the limitation for 2018 is computed by multiplying the participant’s compensation limitation, as adjusted through 2017, by 1.0196.
• Defined contribution plans. The limitation on total annual contributions to defined contribution plans will increase from $54,000 to $55,000 in 2018.
• Annual compensation limit. The maximum amount of annual compensation that may be taken into account for various qualified plan purposes, including plans under Code Sec. 401(a)(17), Code Sec. 404(l), Code Sec. 408(k)(3)(C) , and Code Sec. 408(k)(6)(D)(ii), will increase from $270,000 to $275,000 in 2018.
• Key employee in top-heavy plan. The dollar limitation under Code Sec. 416(i)(1)(A)(i) that is used in the definition of a key employee in a top-heavy plan will remain at $175,000 in 2018.
• Highly compensated employee. The dollar amount used in defining highly compensated employees for nondiscrimination testing purposes under Code Sec. 414(q)(1)(B) will remain at $120,000 in 2018.
• ESOP five-year distribution period. The dollar amount for determining the maximum account balance in an employee stock ownership plan (ESOP) subject to a five-year distribution period will increase from $1,080,000 to $1,105,000 in 2018, while the dollar amount used to determine the lengthening of the five-year distribution period will increase from $215,000 to $220,000.
• Catch-up contributions. The dollar limitation for catch-up contributions to an applicable deferred plan (other than SIMPLE plans) for individuals age 50 or over will remain at $6,000 in 2018. The dollar limitation for catch-up contributions under SIMPLE plans will remain at $3,000 in 2018.
• Compensation limit on grandfathered government plans. The annual compensation limit under Code Sec. 401(a)(17) for eligible participants in certain governmental plans that, under the plan as in effect on July 1, 1993, allowed COLAs to the plan’s compensation limit to be taken into account, will increase from $400,000 to $405,000 in 2018.
• SEP compensation limit. The annual compensation limit under Code Sec. 408(k)(2)(C) will remain at $600 in 2018. Employees who earn more than $600, and who meet other requirements, must be allowed to participate in the employer’s SEP plan.
• SIMPLE salary deferrals. The maximum amount of compensation that an employee/participant may elect to defer to a SIMPLE plan will remain at $12,500 in 2018.
• Deferred compensation plans. The limit on deferrals to Code Sec. 457 deferred compensation plans of state and local governments and tax-exempt organizations will increase from $18,000 to $18,500 in 2018.
• Control employee. The employee compensation amount used in the definition of “control employee” for purposes of the auto commuting valuation rule in Reg. § 1.61-21(f)(5)(iii) will increase from $215,000 to $220,000 in 2018. The compensation amount used in the definition of company officers who are ineligible for the commuting valuation rule in Reg. § 1.61-21(f)(5)(i) will increase from $105,000 to $110,000 in 2018.
Other Key Tax Figures
The IRS has also announced the cost-of-living adjustments (COLA) for the items below for the 2018 tax year.
Qualified transportation fringe benefits. For 2018, an employee will be able to exclude up to $260 a month for qualified parking expenses, and for the combined value of transit passes and transportation in a commuter highway vehicle ($255 a month in 2016 and 2017).
Long-term care premiums. Amounts paid for insurance that covers qualified long-term care services are treated as medical expenses up to specified dollar limits that vary with the age of the taxpayer as of the close of the tax year. For a taxpayer age 40 or younger, the 2018 limit will be $420 (up from $410 in 2017); older than 40 but not more than 50, $780 (up from $770 in 2017); older than 50 but not more than 60, $1,560 (up from $1,530 in 2017); older than 60 but not more than 70, $4,160 (up from $4,090 in 2017); and older than 70, $5,200 (up from $5,110 in 2017).
Payments received under qualified long-term care insurance. Amounts received under a qualified long-term care insurance contract are generally excludable from income as amounts received for personal injuries and sickness, subject to a per diem limitation, which will be $360 in 2018 (unchanged from 2017).
Archer MSAs. For Archer MSA purposes, in 2018, a “high deductible health plan” will be a health plan that: (1) in the case of self-only coverage, the annual deductible is at least $2,300 and not more than $3,450 (up from $2,250 and $3,350 in 2017); in the case of family coverage, the annual deductible is at least $4,600 and not more than $6,850 (up from $4,500 and $6,750 in 2017); and (2) the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $4,600 for self-only coverage (up from $4,500 in 2017), and $8,400 for family coverage (up from $8,250 in 2017).
Limit on health FSA salary reduction contributions under a cafeteria plan. For purposes of determining whether a health flexible spending account (health FSA) benefit will be a “qualified benefit” under Code Sec. 125 for the 2018 plan year, the cafeteria plan must provide that an employee may not elect to have salary reduction contributions in excess of $2,650 made to the health FSA (up from $2,600 in 2017).
Qualified small employer HRA. For 2018, a qualified small employer HRA is an arrangement which, among other requirements, makes payments and reimbursements for qualifying medical care expenses of an eligible employee that do not exceed $5,050 (up from $4,950 for 2017), or $10,250 in the case of an arrangement that also provides for payments or reimbursements for family members of the employee (up from $10,000 for 2017).
Adoption exclusion. Employer-provided adoption assistance may be excluded from an eligible employee’s income for purposes of FIT and FITW if the benefits are provided as part of a qualified adoption assistance program (see Payroll Guide ¶ 3542 ). The adoption exclusion per child (whether or not he or she has special needs) will be limited to $13,840 in 2018 (up from $13,570 in 2017). The adoption exclusion will begin to phase out for taxpayers in 2018 with adjusted gross income (AGI) of over $207,580, and will be fully eliminated when AGI reaches $247,580. These figures were $203,540 and $243,540, respectively, in the 2017 tax year.
Property exempt from levy. The value of property exempt from levy under Code Sec. 6334(a)(2) (fuel, provisions, furniture, and other household personal effects, as well as arms for personal use, livestock, and poultry) may not exceed $9,380 for levies in 2018 (up from $9,200 in 2017). The value of property exempt from levy under Code Sec. 6334(a)(3) (books and tools necessary for the trade, business, or profession of the taxpayer) may not exceed $4,690 for levies issued in 2018 (up from $4,600 in 2017). For further information on tax levies.
Deemed substantiation for reimbursement of employees’ expenses. Under an optional deemed substantiation rule, eligible employers in the pipeline construction industry can provide reimbursements that will be treated as made under an accountable plan to employees who furnish welding rigs or mechanics rigs. For calendar year 2018, an eligible employer may pay up to $18 per hour (up from $17 for 2017) for rig-related expenses. If the employer provides fuel or otherwise reimburses fuel expenses, an eligible employer may pay up to $11 per hour (unchanged from 2017).
Foreign earned income exclusion. Individuals who have a tax home in a foreign country, and who satisfy either a bona fide foreign residence test or a foreign physical presence test, may elect to exclude a certain amount of their foreign earned income from gross income in a tax year. The foreign earned income exclusion amount will increase from $102,100 to $104,100 in 2018.
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This information is provided as a courtesy, may change and is not intended as legal or tax guidance. Employers with questions or concerns outside the scope of a Payroll Service Provider are encouraged to seek the advice of a qualified CPA, Tax Attorney or Advisor.