The Internal Revenue Service has released its official 2016 figures concerning 401(k) and flexible spending account limits and the numbers are will stay close to those in 2015. Low inflation will also keep Social Security Payroll withholding (FICA) low.
2016 Contributions
Pension plan limitations change when the cost-of-living index increases and meets the statutory threshold, according to the IRS. Each adjustment must surpass a different limit to be trigger an increase, resulting in alterations to some figures, but not others.
Contribution limits affect 401(k) plans, as well as 403(b), 457 and the Thrift Savings Plan. Here's a breakdown of those retirement options:
- 401(k): Pre-taxed employee contributions to a retirement fund; can be matched by employer.
- 403(b): Tax-sheltered retirement plan for specific employees of public schools, tax-exempt organizations and some ministers; annuity, custodial or regular retirement options.
- 457: Defined contribution plan available to state and local federal employees, as well as certain non-governmental employers, including some nonprofit organizations.
- Thrift Savings Plan: Defined contribution plan for U.S. civil service employees and retirees, as well as uniformed service members.
In 2015, the limit for employees using these contribution plans increased from $17,500 to $18,000. The 401 (k) catch-up contribution limit for employees aged 50 and older will remain at $6,000. The total contribution limit, the combination of both employers and workers, was $53,000. Lastly, the catch-up threshold for employees 50 years or older rose from $5,500 to $6,000. Furthermore, the individual contributions to Individual Retirement Arrangements remained at $5,500 in 2015. These figures will all remain the same for 2016.
Limits for health savings accounts have already been released by the IRS. As with the other predictions, the individual threshold will stay the same at $3,350. Family coverage contributions, on the other hand, experienced a $100 raise, resulting in a $6,750 limit.
"The IRS will look at the cost of living adjustment and the consumer price index to make contribution limit alterations."
Slight increase in CPIB
In addition to the cost of living adjustment, the IRS will look at the consumer price index to make alterations to contribution limits. Since the CPI only rose 0.2 percent in the past year, increasing the likelihood that thresholds will either remain the same or be subject to minute escalation. This small CPI could result in a slightly higher annual limit on health FSAs, although Business Insurance thinks it is unlikely.
No raise for Social Security
The Social Security Administration recently announced there will not be an increase for the benefit in 2016. Since the cost of living adjustment is tied to inflation – and the price of goods services used to calculate the rate have fallen – seniors won't see an alteration.
"…Since the goods retirees consume have actually increased in price over the last year, it means that retirees are going to be slightly worse off next year vs. this year, since their Social Security retirement benefits aren't going to be increasing, but their expenses have been," David Blanchett, head of retirement research at Morningstar Investment Management in Chicago, said to USA Today.
This is a factor employees nearing retirement age have to consider, but will help maintain or reduce company costs.
The maximum amount of wages subject to Social Security taxes will hold at $118,500 and the 12.4 percent tax rate – 6.2 percent paid by each employers and employees – will also remain unchanged. This means employees making $118,500 or more annually can make a maximum contribution of $7347.
Medicare tax rate unchanged
The employer-paid portion of the Medicare tax rate remains at 1.45 percent. Certain annual compensation amounts may trigger the Additional Medicare Tax of 0.9 percent. The yearly salaries that exceed the threshold are subject to this extra expense on the employee-paid portion of the contribution.
The annual compensation limits that will incur the Additional Medicare Tax are:
- $125,000 for married taxpayers who file separately.
- $200,000 for single and all other taxpayers.
- $250,000 for married taxpayers who file jointly.
Next steps for HR
Now that the IRS has announced the figures for 2016, HR should ensure all employees are informed of the changes; specifically those adjustment that apply to the employer-offered retirement plans. HR should also disperse information surrounding the company's contribution programs to make sure workers know all necessary details regarding their savings.