2013 Annual Benefit Plan Amounts

2013 INFLATION ADJUSTMENTS

Following recent announcements by both the IRS and the Social Security Administration, we now know most of the dollar amounts that employers will need to administer their benefit plans for 2013.  Many of the new numbers are slightly higher than their 2012 counterparts. For instance, the annual 401(k), 403(b), or 457(b) deferral limit will increase from $17,000 to $17,500; the Section 415 limit on annual additions to a participant's account will go from $50,000 to $51,000; and the annual compensation limit will increase from $250,000 to $255,000.  (The annual retirement plan catch-up contribution limit -- $5,500 -- will remain unchanged for 2013.)

The annual compensation threshold used in identifying highly compensated employees (HCEs) remains unchanged for 2013 (at $115,000).  In identifying HCEs for 2013, employers should consider employees who earned at least $115,000 during 2012 (as well as 5% owners during either 2012 or 2013).  This is due to the "look-back" nature of the HCE definition.

The annual limit on IRA contributions (whether traditional or Roth) will increase from $5,000 to $5,500, while the annual limit on IRA catch-up contributions will remain at $1,000.

The maximum contribution to an HSA will increase slightly -- from $3,100 to $3,250 for individual coverage, and from $6,250 to $6,450 for family coverage -- while the maximum HSA catch-up contribution will remain at $1,000.  The minimum deductible for any high-deductible health plan (which must accompany any HSA) will also increase slightly -- from $1,200 to $1,250 for individual coverage, and from $2,400 to $2,500 for family coverage.

A new $2,500 limit on employee deferrals to health FSAs will apply for plan years beginning on or after January 1, 2013.  This $2,500 limit applies only to salary reduction contributions under a health FSA and not to employer contributions.  For this purpose, however, any employer FSA contributions that could have been received in cash are treated as salary reduction contributions.

The Social Security taxable wage base will increase for 2013 -- from $110,100 to $113,700.  A question yet to be answered is whether employees will continue to enjoy a temporary reduction in the long-standing 6.2% "OASDI" tax rate.  For 2011 and 2012, that rate has been temporarily reduced by two percentage points (to 4.2%), as a way of helping to stimulate the economy.  Although there does not appear to be significant sentiment in either of the major political parties to extend this reduction, there is a slight chance that the 4.2% rate will remain in effect for 2013.  (In any event, the employer OASDI tax rate will remain at 6.2%.)

The Medicare tax rate has long been set at 1.45% -- for both employees and employers.  Beginning in 2013, however, the employee Medicare tax rate will increase by 0.9% (to a total of 2.35%) on wages in excess of $200,000 for single filers or $250,000 for joint filers ($125,000 for married individuals filing separately).  Employers must start withholding this additional Medicare tax once an employee's Medicare wages have exceeded $200,000.  This additional Medicare tax does not apply to the employer's share.
To obtain a quick reference card listing the 2013 annual benefit plan amounts, please contact your UBA Member Firm.

This legislative update is brought to you by: 

COMPLIANCE ALERT: Defined Benefit Plan Deadlines

CRITICAL AMENDMENT DEADLINE APPROACHING FOR DEFINED BENEFIT PLANS

Sponsors of single-employer defined benefit pension plans will need to amend those plans soon to comply with a critical requirement of the Pension Protection Act of 2006 (the PPA).  As explained more fully below, meeting this deadline is crucisal because the IRS has conditioned anti-cutback relief on a timely amendment.  If the cutbacks required under the PPA are implemented without a timely amendment, the plan risks disqualification, and the plan sponsor may be liable to participants and beneficiaries.

MANDATORY FUNDING-BASED RESTRICTIONS

One of the many requirements introduced by the PPA was a new regime of restrictions on benefit accruals under, distributions from, and amendments to certain underfunded defined benefit plans.  These restrictions arise under Section 436 of the Tax Code, a new section added by the PPA.  Under Section 436, a plan's underfunded status triggers the following mandatory cutbacks:

• If the plan has an adjusted target funding attainment percentage (AFTAP) of less than 60 percent for a plan year:
• the plan is not permitted to make lump-sum distributions or certain other accelerated payments, such as unpredictable contingent event benefits (e.g., plant shutdown benefits), and
• benefit accruals under the plan must cease. 
• If the plan has an AFTAP of less than 80 percent for a plan year (but not less than 60 percent):
• the portion of any benefit that may be paid as a lump sum (or other accelerated form) is limited, and
• the plan cannot be amended to increase benefits. 

(The Section 436 rules are quite complex and have been simplified for purposes of this summary.)

CATCH 22:  PPA'S ANTI-CUTBACK RELIEF

Thus, Section 436 requires benefit cutbacks (based on a plan's funded status) that are specifically prohibited by the anti-cutback rules in ERISA and the Tax Code.  To resolve this contradiction, the PPA created a limited window during which sponsors may adopt the necessary amendments without violating the anti-cutback rules.

WHEN AND WHY NEW AMENDMENTS ARE NECESSARY

Although the Section 436 restrictions have been in effect since the first day of the plan year that began in 2008, Congress has since revised the applicable funding rules (in both the Worker, Retiree, and Employer Recovery Act of 2008 and the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010).  Moreover, following the PPA's enactment, the IRS has issued no fewer than five pieces of formal guidance on Section 436 (two sets of proposed regulations, two notices, and final regulations).  As the statutory changes and regulatory guidance have accumulated, the IRS has repeatedly extended the amendment deadline--and therefore the anti-cutback relief.  (We first reported on this delay in an August 2010 article.)

Those extensions are now at an end.  Late last year, in Notice 2011-96, the IRS finally issued a model amendment and finalized the Section 436 amendment deadline.  Although there are exceptions, the general deadline is the last day of the 2012 plan year.  For calendar-year plans, this makes the deadline December 31, 2012.

Many sponsors have long-since adopted a "good-faith" Section 436 amendment as part of a comprehensive amendment to implement the PPA.  Sponsors should no longer rely on these temporary amendments.  Instead, these place-holders should be replaced with the IRS's model language before the applicable deadline to ensure that any benefit reductions required under Section 436 are protected by the PPA's anti-cutback relief.

OPTIONAL PROVISIONS

In addition to formalizing the Section 436 rules, the IRS's model amendment includes four optional modifications.  Each of these aims to help participants who are adversely affected by mandatory benefit restrictions.

Two of these optional provisions would allow participants who are prohibited from taking accelerated distributions to later elect those distributions when the plan's funding level has improved sufficiently for the Section 436 restrictions to be lifted.  The third expands the timing and payment options available to participants during any period when distribution options are limited by Section 436.  The fourth optional provision automatically restores benefit accruals that were cancelled during a period when such accruals were limited by Section 436.  Sponsors may elect any or all of these options.

This legislative update brought to you by: