2018 § 401(k) and Other Retirement Plan Limits Increase, Fringe Benefit Limits Adjusted

Author: Rena Pirsos, XpertHR Legal Editor

October 24, 2017

The IRS has released the 2018 cost-of-living adjustments (COLAs) to the dollar limitations on benefits and contributions to qualified retirement and deferred contribution plans, such as § 401(k) plans. It has also released the inflation-adjusted fringe benefit limitations. 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.

Defined Contribution Plans

The maximum amount employees can contribute in 2018 to their § 401(k) or § 403(b) accounts will be $18,500 (increased from $18,000). The overall pretax, after tax and employer matching contribution limit will be $55,000 (increased from $54,000).

The following are additional 2018 amounts:

• The annual compensation limit for figuring contributions to defined contribution plans will be $275,000 (up from $270,000).
• The catch-up contribution limit for employees aged 50 and older who participate in § 401(k) or § 403(b) plans will remain $6,000.
• The amount an employee must earn to participate in a simplified employee pension (SEP) will remain $600 a year.
• The amount an employee can contribute on a pre-tax basis into a SIMPLE retirement account will remain $12,500.
• The maximum catch-up contribution for an employee who participates in a SIMPLE retirement account or SIMPLE § 401(k) plan will remain $3,000.
• The salary amount used to define a key employee in a top-heavy plan will remain $175,000.
• The salary amount used to define a highly-compensated employee will remain $120,000.

Defined Benefit Plans

The following inflation adjustments relate to traditional pension and defined benefit plans:

• The limitation on the annual benefit under a defined benefit plan will increase to $220,000 (up from $215,000).
• The limitation under a defined benefit plan for a participant who separated from service before January 1, 2018, will be computed by multiplying the participant's compensation limitation, as adjusted through 2017, by 1.0197.

Employee Stock Ownership Plans

The following inflation adjustments relate to employee stock ownership plans (ESOPs):

• The dollar amount for determining the maximum account balance in an ESOP that is subject to a five-year distribution will increase to $1,105,000 (up from $1,080,000).
• The dollar amount used to determine the lengthening of the five-year distribution period in an ESOP will be $220,000 (up from $215,000).

Individual Retirement Accounts

The following are the 2018 amounts attributable to employee contributions to an individual retirement account (IRA), as well as the income limits related to these arrangements:

• The maximum individual contribution to an IRA will remain $5,500.
• The maximum additional catch-up contribution for individuals aged 50 and older will remain $1,000.
• The dollar amount for determining the IRA contribution for an employee who is an active participant in an employer retirement plan and files an income tax return as a joint filer or qualifying surviving spouse will increase to $101,000 (up from $99,000).
• The dollar amount for other taxpayers who are active IRA participants (other than married taxpayers filing separate returns) will increase to $63,000 (up from $62,000).
• The dollar amount for a taxpayer who is not an active participant in an employer retirement plan but whose spouse is an active participant will increase to $189,000 (up from $186,000).
• The phase-out ranges for contributions to a traditional, deductible IRA will be:
  • $63,000 to $73,000 (up from $62,000 to $72,000, respectively) for single taxpayers;
  • $101,000 to $121,000 (up from $99,000 to $119,000, respectively) for married taxpayers filing jointly if the spouse making the IRA contribution is covered by an employer retirement plan; and
  • $189,000 to $199,000 (up from $186,000 to $196,000, respectively) for an IRA contributor who is not covered by a workplace retirement plan but whose spouse is covered.
• The adjusted gross income (AGI) limit for determining the maximum Roth IRA contribution for married taxpayers filing jointly, or for qualifying surviving spouses, will be $189,000 (up from $186,000).
• The AGI limit for all other taxpayers (other than married taxpayers filing separate returns) will increase to $120,000 (up from $118,000).
• The income phase-out range for taxpayers making contributions to a Roth IRA will be:
  • $120,000 to $135,000 for single taxpayers and heads of household (up from $118,000 to $133,000, respectively); and
  • $189,000 to $199,000 for married taxpayers filing jointly (up from $186,000 to $196,000, respectively).
• The saver's credit (or the retirement savings contributions credit) income limit for low- and moderate-income workers will be:
  • $63,000 for married couples filing jointly (up from $62,000);
  • $47,250 for heads of household (up from $46,500); and
  • $31,500 for single taxpayers and married taxpayers filing separately (up from 31,000).

Definition of Control Employee

An employer may value an employee's use of a company car provided for commuting by using the commuting valuation rule. However, this rule cannot be used for certain control employees who earn above a certain amount.

For 2018, the compensation amount defining a control employee will be:

• $110,000 for a control employee who is a corporate board member or officer (up from $105,000); and
• $220,000 for a control employee who is not a corporate board member or officer (up from $215,000).

Fringe Benefit Limits

The following fringe benefit limitation amounts have been adjusted for inflation for 2018:

• An employer may provide an employee with up to $13,840 in adoption assistance benefits (up from $13,570) on a tax-free basis. The benefit begins to phase out for an employee who earns more than $207,580 (up from $203,540), and is completely phased out for an employee who earns more than $247,580 (up from $243,540).
• The monthly amount an employee can exclude from income for employer-provided parking or mass transit benefits will increase to $260 (up from $255).
• For plan years beginning in 2018, the maximum amount an employee may defer to a health savings account will increase to $2,650 (up from $2,600).
• For Archer medical savings accounts:
  • The range for determining high-deductible health plans for self-only coverage will be $2,300 to $3,450 (up from $2,250 to $3,350).
  • The limit on out-of-pocket expenses for individuals with self-only coverage will be $4,600 (up from $4,500).
  • The range for determining high-deductible health plans for family coverage will be $4,600 to $6,850 (up from $4,500 to $6,750).
  • The limit on out-of-pocket expenses for an individual with family coverage will be $8,400 (up from $8,250).
• The maximum amount of long-term care insurance that is excludable from an employee's income per day will remain $360.
• The total amount of payments and reimbursements for qualified small employer health reimbursement arrangements will be $5,050 for self-only coverage (up from $4,950) and $10,250 for family coverage (up from $10,000).

Foreign Earned Income, Housing Amounts

To avoid double taxation, the Internal Revenue Code allows an employee who works overseas to exclude certain amounts from income. The following are the 2018 amounts:

• The maximum foreign earned income exclusion will be $104,100 (up from $102,100).
• The maximum foreign housing exclusion will be $14,574 (up from $14,294).
• The foreign housing-cost exclusion limitation will be $31,230 (up from $30,630).
• The base housing amount will be $16,656 (up from $16,336).

Pipeline Construction Industry Per Diems

The pipeline construction industry per diems will be $11 per hour for fuel (unchanged) and $18 per hour (up from $17 per hour) for rig-related expenses that are deemed substantiated.