2005 Plan Limits
The Internal Revenue Service announced cost-of-living adjustments applicable to dollar limitations for pension plans and other items for Tax Year 2005.

Section 415 of the Internal Revenue Code provides for dollar limitations on benefits and contributions under qualified retirement plans. It also requires that the Commissioner annually adjust these limits for cost-of-living increases.

The elective deferral limit described in section 402(g)(3) is increased from $13,000 to $14,000. This limitation affects elective deferrals to section 401(k) plans and to the Federal Government’s Thrift Savings Plan, among other plans. For SIMPLE plans the limit has increased from $9,000 to $10,000.

Participants can now contribute 100% of their wages up to $14,000.

The additional catch-up contribution limit for participants who are more than 50 years old or will attain the age of 50 during 2005 is $4,000. The dollar limitation for catch-up contributions to a SIMPLE plan for individuals aged 50 or over is increased from $1,500 to $2,000.

The 415 limit for defined contribution plans, or the total employee and employer contributions, excluding catch-up contributions, plus forfeitures credited to each participant’s account during the plan year, is the lesser of $42,000 or 100% of the participant’s wages for the plan year.

Effective January 1, 2005, the limitation on the annual benefit under a defined benefit plan is increased from $165,000 to $170,000.

The compensation threshold used for determining highly compensated employees for nondiscrimination testing purposes increased from $90,000 to $95,000 for 2005.

Highly compensated employees are determined by using the employees’ wages from the prior year. Thus, for the 2006 nondiscrimination testing, highly compensated employees are either owners or employees who earned more than the $95,000 compensation threshold in 2005.

The dollar limitation concerning the definition of key employee in a top-heavy plan is increased to $135,000.

The annual compensation limit increased from $205,000 in 2004 to $210,000 in 2005, which means that only wages up to that amount are taken into account for retirement plan purposes.

The social security wage base has increased to $90,000 from $87,900.

Administrators of defined benefit or defined contribution plans that have received favorable determination letters should not request new determination letters solely because of yearly amendments to adjust maximum limitations in the plans.