The Protecting Americans from Tax Hikes Act (PATH Act), which was passed by Congress in December 2015, made important changes to tax law and regulations effective for tax years beginning on or after January 1, 2016. Other pieces of legislation impacting 2016 were the Bipartisan Budget Action of 2015, the Surface Transportation and Veteran’s Health Care Choice Improvement Act of 2015, and various IRS administrative announcements (passed throughout 2014 and 2015).
The final installment of our four-part series will cover specific items of tax legislation for retirement and benefit plans. The legislation and administrative actions we are highlighting are: expanded list for SIMPLE rollovers, changes to IRA contribution thresholds and phase-outs, and Qualified Retirement Plan contribution limits.
Catch up on our entire series “What’s New for Taxes in 2016” series for updates that pertain to retirement plans. Part I of our series focused on items affecting individuals, Part II covered updates specifically for partnerships, and Part III provided updates for businesses.
Expanded List for SIMPLE Rollovers
In general, an employer with 100 or fewer employees that does not have a qualified plan can establish a SIMPLE (Savings Incentive Match Plan for Employees) retirement plan, without having to meet most requirements for qualified plans. Prior to December 18, 2015, SIMPLE retirement plans could only accept rollovers from another SIMPLE IRA. Effective for contributions after December 18, 2015, rollover contributions to an employee’s SIMPLE retirement account are permitted from the following types of retirement accounts under rollover rules for their respective IRS Code:
- Traditional IRA
- Qualified Pension
- Qualified Profit-Sharing Plans
- Qualified Stock Benefits
- Qualified Annuity
- 403(b) Tax-sheltered Annuity
- Governmental Section 457 Plan
No rollover contributions are permitted to be made to the SIMPLE retirement account until after the two-year period beginning on the date that the employee first participated in a qualified salary reduction arrangement maintained by the employer.
Changes to IRA Contribution Thresholds and Phase-outs
For taxpayers filing as married filing jointly, the deduction for contributions to a Traditional IRA is phased out if the couple’s total income is $184,000-$194,000, up from $183,000-$193,000, for an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered. Often this type of IRA is referred to as a spousal IRA, because contributions can be made even if only one spouse has earned income. The contribution limits remain unchanged from 2015 at $5,500, with an additional catch-up contribution of $1,000 for those taxpayers over age 50.
The AGI phase-out range for taxpayers making contributions to a Roth IRA is $184,000-$194,000 for married couples filing jointly, up from $183,000-$193,000. For singles and heads of household, the income phase-out range is $117,000-$132,000, up from $116,000-$131,000.
The AGI limit for the saver’s credit (also known as the retirement savings contribution credit) for low- and moderate-income workers is $61,500 for married couples filing jointly, up from $61,000; $46,125 for heads of household, up from $45,750; and $30,750 for married individuals filing separately and for singles, up from $30,500.
The maximum saver’s credit is $1,000 ($2,000 for married couples filing jointly). A tax credit is a dollar for dollar reduction in your tax bill. There are few rules: you must be at least 18, cannot have been a full-time student during the tax year, and another person cannot claim you on their tax return.
Qualified Retirement Plan Contribution Limits
If you haven’t maxed out your employer’s retirement plan, it may not be too late. Speak with your company’s plan administrator about how to maximize your contributions, and defer some income and taxes. Depending on your plan, you may be leaving free money on the table if you do not take advantage of any matching amounts from your employer.
Effective as of January 1, 2016, the cost of living increases in the dollar limitations on pension plan benefits and contributions are as follows, some of which remain unchanged from 2015:
Code Sec. 402(g)(1) – 401(k) plan elective deferrals,
Code Sec. 457(e)(15) – Government and tax-exempt organizations elective deferrals:
- 2016 – $18,000 (Catch-up contribution for 50 or older – $6,000 additional)
Code Sec. 415(b)(1)(A) – Maximum annual benefit on defined benefit plans:
- 2016 – $210,000
Code Sec. 415(c)(1)(A) – Maximum contribution for defined contribution plan:
- 2016 – $53,000
Code Sec. 401(a)(17) – Annual compensation limit for plans,
Code Sec. 404(I) – Annual compensation limit for employer limit,
Code Sec. 408(k)(3)(C) – SEP compensation limits:
- 2016 – $265,000
Code Sec. 408(k)(2)(C) – Maximum wage exclusion under SEP Plans:
- 2016 – $600
Code Sec. 408(p)(2)(E) – SIMPLE IRA or SIMPLE 401(k) Plans elective deferrals:
- 2016 – $12,500 (Catch-up contribution for 50 or older – $3,000 additional)
Code Sec. 414(q) – Definition of highly compensated employee – Compensation in excess of:
- 2016 – $120,000
HIGHLY COMPENSATED EMPLOYEE
Section 414(q) – The term “highly compensated employee” for the 2016 year means any employee who performs services for the employer during the current year and:
- Was a 5-percent owner at any time during the current year or preceding year.
- Received compensation in excess of $120,000 for the preceding year and, if the employer so elects, was in the top-paid group, consisting of the top 20 percent, of the employees in the preceding year.
Section 416(i) – The term “key employee” means an employee who, at any time during the plan year, is:
- An officer of the employer having an annual compensation greater than:
- 2016 – $170,000
- A 5-percent owner of the employer, or a 1-percent owner of the employer having an annual compensation from the employer of more than $150,000.
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