Annual Retirement Plan COLAs and Fringe Benefit Limitations
Author: Alice Gilman
At the end of each year, the Internal Revenue Service (IRS) adjusts many tax- and benefit-related figures for inflation based on changes to the Consumer Price Index. These adjustments are often referred to as cost of living adjustments (COLAs). Without adjustments for inflation, the value of employees' benefits would decrease over time. Employers need to know the increases in these amounts so they can reprogram their computers and payroll systems before the first payroll of the upcoming year. This will ensure that they are withholding the correct amount of taxes from the pay of employees who receive the benefits.
COLAs are made not only to the amount employees may contribute on a pretax basis to Internal Revenue Code (IRC) § 401(k) plans and other qualified plans, but also to the overall maximum amount employees may contributed to these plans - known as the IRC § 415 limitation. In addition, COLAs apply to the salaries for certain highly compensated employees, which is a key consideration in discrimination testing.
Fringe Benefits are also subject to COLAs. Annual adjustments are made to the amounts that an employee may receive from an employer for qualified parking and mass transit benefits, as well as to the amounts that may be excluded from an employee's income for adoption assistance. In addition, many health benefits are inflation-adjusted annually, including the maximum amount employees can contribute on a pretax basis to health flexible spending and medical savings accounts.
Finally, COLAs apply to the income tax brackets and the standard deduction amounts that taxpayers who do not itemize deductions may claim on their personal income tax returns.
The following chart provides employers with a comparison of the current and prior year retirement plan and fringe benefit COLAs and limits.