The IRS Announces Updated Limitations Related to Employer Plans; 401(k) Contribution Limit Increases to $19,000 for 2019

The IRS announced cost of living adjustments affecting dollar limitations for employer plans for tax year 2019. The IRS issued technical guidance detailing these items in Notice 2018-83, in addition to previous guidance in Rev. Proc. 2018-30.

Many, but not all, of the limitations will change because the increase in the cost-of-living index met the legal thresholds that trigger their adjustment.

Retirement Plan Limitation Highlights for 2019

The following will likely be of the greatest interest to employers who sponsor retirement plans:

  • The elective deferral limit for employees who participate in 401(k), 403(b), and most 457 plans is increased from $18,500 to $19,000.
  • The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), and most 457 plans remains unchanged at $6,000.
  • The maximum contribution limitation for defined contribution plans is increased in 2019 from $55,000 to $56,000 under Code §415(c)(1)(A).
  • The limitation on the annual benefit under a defined benefit plan is increased from $220,000 to $225,000 under Code §415(b)(1)(A).
  • The annual compensation limit is increased from $275,000 to $280,000 under Code §§401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii).
  • The limitation used in the definition of highly compensated employee is increased from $120,000 to $125,000 under Code §414(q)(1)(B).
  • The dollar limitation concerning the definition of key employee in a top-heavy plan is increased from $175,000 to $180,000 under Code §416(i)(1)(A)(i).

Welfare and Fringe Benefit Limitation Highlights for 2019

For health savings accounts (“HSAs”), the IRS announced that the amount that individuals may contribute annually to their HSAs for self-only coverage will rise by $50 next year to $3,500, and will rise by $100 to $7,000 for those with family coverage.

The IRS has yet to announce the pre-tax salary reduction limit for health flexible spending accounts (“FSAs”). The limit for 2018 was $2,650.

 What These Changes Mean for Employers

Employers that are plan sponsors should ensure that their systems and formulas are updated to include the limits that have been adjusted. These limits are effective January 1, 2019.

Additionally, employers may consider that these limitation changes will affect nondiscrimination testing results, and increase the maximum permissible profit sharing allocations and the maximum benefit available under a defined benefit plan.

Finally, employers in the midst of open enrollment may wish to use the 2018 limit for health care FSA enrollment, as it is unclear whether or when the IRS will raise that pre-tax salary reduction limit at this time.

About the Author:

Eric W. Gregory is an Associate in Dickinson Wright’s Troy office where he assists clients in all areas of employee benefits law, including qualified retirement plans, welfare plans, and non-qualified compensation programs. Eric can be reached at 248-433-7669 or and you can visit his bio here.