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On October 27, the Internal Revenue Service released its cost of living adjustments for limitations on retirement plans for the upcoming year.

Retirement Plan Limitation Changes for 2017

Several Key Contribution Limits Increase, But Only Slightly

On October 27, the Internal Revenue Service released its cost of living adjustments for limitations on retirement plans for the upcoming year. While most of the amounts did not change, there were a few notable retirement plan increases  over the last two years.

401(k), 403(b) and Profit Sharing Plans

Because defined contribution plans allow participants to contribute to their retirement accounts tax-free, the IRS imposes limitations on how much money employees may contribute to their accounts. For 2017, the maximum annual compensation amount used to calculate contributions as a percentage of salary has increased to $270,000 — up from $265,000 in 2016 and 2015. However, with this change in maximum compensation did not come a change in maximum contributions. Participants are still limited to $18,000 total contributions to their plan.

Simplified Employee Pension (SEP)

Like the defined contribution plans, annual compensation used to calculate SEP contributions increased from $265,000 in 2015 and 2016 to $270,000 in 2017.

Employee Stock Ownership Plan (ESOP)

The dollar amount for determining the maximum account balance under an ESOP that is subject to a 5-year distribution period is now $1,080,000. The amount was $1,070,000 in 2016 and 2015.

Defined Benefit (DB)

Plans While defined contribution plans allow participants to control the amount they invest, alternately, DB plans dictate the benefit that will be paid at the end of an employee’s tenure. Hence, the IRS limitations for DB plans are placed on the benefits paid, rather than the contributions received. Benefits are limited to 100% of the participant's average compensation for the highest 3 consecutive calendar years or $215,000. This amount was $210,000 in 2016 and 2015.

The aforementioned increases let plan participants build up their retirement plan accounts while at the same time potentially reduce their tax burdens, if the amounts are contributed from pre-tax dollars. We’ve put together a table of the complete list of retirement plan limitations for 2017 and the preceding two years.

Peter Alwardt is a Tax Partner specializing in employee benefits, tax and ERISA issues for domestic and international clients. He is a member of the American Institute of Certified Public Accountants and NY State Society of CPAs.

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