Employment LawScene Alert: IRS Announces 2018 FSA, Transportation, and Employee Benefit Plan Limits

The Internal Revenue Service has released the cost-of-living adjustments to the dollar limits under various employer-sponsored benefit plans for 2018. Several key limits (indicated in bold, below) have been increased for 2018.

Employer-sponsors of benefit plans should update payroll and plan administration systems for the 2018 limits and ensure that any new limits are incorporated into relevant participant communications, enrollment materials and summary plan descriptions, as applicable.

Health FSA Employee Contribution and Transportation Plan Limits

• For 2018, the maximum dollar limit on employee contribution to health flexible spending arrangements (FSAs) will increase to $2,650 from the prior limit of $2,600. An Employer is not required to adopt the new Health Care FSA increase, but may do so as long as the Health FSA Plan document is expressly amended for this purpose.
• The maximum pre-tax value of a qualified transportation plan for employee parking or transit passes will increase by $5 to $260 per employee, per month in 2018.

2018 Qualified Retirement Plan Limits

For retirement plans beginning on and after January 1, 2018, the following dollar limitations apply for tax-qualified retirement plans:

• The elective deferral limit under Section 402(g) or the Internal Revenue Code (Code) will increase from $18,000 to $18,500 for employees who participate in:
  • Code Section 401(k) plans;
  • Code Section 403(b) plans; and
  • Most Code Section 457 plans.
• The catch-up contribution limit for those age 50 and over under will remain unchanged at $6,000 for all plans other than SIMPLE 401(k) and SIMPLE IRAs. (For these SIMPLE plans, the catch-up contribution limit for those age 50 and over under will remain unchanged at $3,000).
• The limitation on the annual benefit for a defined benefit plan will increase from $215,000 to $220,000.
• The limitation on annual additions (meaning total employee plus employer contributions) to a participant’s defined contribution plan will increase from $54,000 to $55,000.
• The limit on the amount of annual compensation taken into account under a tax-qualified retirement plan will increase from $270,000 to $275,000.
• The limitation used in the definition of a highly compensated employee (HCE) under Code Section 414(q) will remain unchanged at $120,000.
• The limitation used in the definition of a key employee in a top-heavy plan under Code Section 416 will remain unchanged at $175,000.
• The dollar amount under Code Section 409(o) for determining the maximum account balance in an employee stock ownership plan (ESOP) subject to a five-year distribution period will increase from $1,080,000 to $1,105,000.
• The dollar amount used to determine the lengthening of the five-year distribution period will increase from $215,000 to $220,000.

Prior Guidance on Additional 2018 Limits

Social Security Taxable Wage Base

As announced in mid-October (and adjusted in November), the Social Security Administration announced that the Social Security wage base for 2018 will increase slightly (from $127,000) to $128,400. This is the maximum wage base subject to the FICA tax and is also the maximum “integration level” for retirement plans using “permitted disparity.”  (The 2018 increase is about 1% higher than the 2017 wage base.  In contrast, the 2017 wage base increase was more than 7% higher than the 2016 amount).

2018 Health Savings Account Limits

In May of this year, the IRS announced that combined annual contributions to a Health Savings Account (HSA) in 2018 must not exceed the maximum annual deductible HSA contribution, which will be $3,450 for single coverage and $6,900 for family coverage.  These limits reflect a $50 and $150 increase over the 2017 maximums, respectively.  The catch-up contribution for eligible individuals who will attain age 55 or older by year end remains at $1,000.