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Compensation Planning & Employee Benefits

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Benefit Plans: 2007 Cost-Of-Living And Statutory Adjustments

October 2006

The Internal Revenue Service has announced cost-of-living and statutory adjustments to certain employee benefit plan dollar limitations for 2007. The 2007 limitations are as follows:

  1. The compensation limit for calculating benefits and contributions, for general and 401(k) discrimination testing, and for determining tax deductions increases from $220,000 in 2006 to $225,000 for plan years beginning in 2007.
  2. The calendar year 401(k) contribution limitation increases from $15,000 in 2006 to $15,500 in calendar year 2007.
  3. The calendar year dollar limitation for catch-up 401(k) contributions for individuals who, in 2007, are age 50 or above is $5,000 (the amount remains unchanged from 2006).
  4. For plan years ending in 2007, a “highly compensated employee” is one who (a) was a more-than-5% owner during the year or the preceding year, or (b) for the preceding year (i) had compensation in excess of $100,000 (the amount remains unchanged from 2006) and (ii) if the employer elects for the plan year, was in the top-paid group of employees. (The top-paid group is the top 20% of the employees based on compensation.)
  5. For plan limitation years ending in 2007, the annual dollar benefit limitation under a defined benefit plan increases from $175,000 in 2006 to $180,000 in 2007. For participants who separated from service before January 1, 2007, the 100% of average high-three-years’ compensation limit is computed by multiplying the participant’s compensation limitation, as adjusted through 2006, by 1.0334.
  6. The annual dollar limitation on additions to defined contribution plans increases to $45,000 for plan limitation years ending in 2007. In 2006, the defined contribution plan dollar limitation was $44,000.
  7. The dollar amount used in determining the maximum account balance in an employee stock ownership plan subject to a five-year distribution period increases to $915,000 in 2007 (from $885,000 in 2006), while the dollar amount used to determine the lengthening of the five-year distribution period increases to $180,000 (from $175,000 in 2006).
  8. In defining who is a key employee in a top-heavy plan, for plan years ending in 2007, the compensation threshold for an officer increases to $145,000 (from $140,000 in 2006).
  9. The social security taxable wage base for 2007 (applicable to integrated plans with plan years beginning in 2007) increases to $97,500 from $94,200 in 2006.

REMINDER  FOR  401(k)  SAFE  HARBOR  PLANS

All 401(k) plans that have elected to use the safe harbor method of satisfying the 401(k) nondiscrimination rules must provide a safe harbor notice to current eligible participants at least 30 days and no more than 90 days before the beginning of each plan year. For plans with a December 31 year-end, the safe harbor notice for 2007 must be furnished no later than December 1, 2006.

In addition to the annual notice requirement discussed above, each new eligible participant must receive the notice no earlier than 90 days before he or she becomes a participant and no later than the entry date on which he or she becomes a participant.

If you have any questions, please contact a member of our Compensation Planning & Employee Benefits Group.