IRS Announces Retirement Plan Limits for 2006

On Friday, October 14, 2005, the IRS announced the 2006 cost-of-living adjustments for the various dollar limits that apply to benefits under retirement plans. There are several significant increases in the limits for next year. For example:

• The Section 415 limits increase from $42,000 to $44,000 for 401(k) and other defined contribution plans, and from $170,000 to $175,000 for defined benefit plans.

• The limit on the annual compensation that can be taken into account by qualified plans increases from $210,000 to $220,000.

• The dollar level for becoming a highly-compensated employee increases from $95,000 to $100,000 of pay in 2006 for determinations in 2007.

There are of course a number of increases that will occur in 2006 due to changes in the law made by the 2001 Tax Act (known as "EGTRRA"). The limit on elective deferrals under 401(k) plans, 403(b) plans and 457 plans will increase from $14,000 to $15,000. The limit on extra catch-up contributions by participants age 50 or older will increase from $4,000 to $5,000, thus allowing a total contribution of $20,000 by such participants in 2006. The limits on contributions to IRAs and SIMPLE plans will also increase next year.

The Social Security Administration also announced on Friday that the Social Security wage base will increase from $90,000 in 2005 to $94,200 in 2006.

The IRS has not yet announced the 2006 limits for reimbursement of mass transit expenses and parking expenses under qualified transportation fringe benefit plans.