401(k): Inflation Adjustments & Plan limits for 2016

The IRS has provided 401(k) inflation adjustments for 2016 that could impact certain dollar limits that apply to 401(k) plans for 2016. An overview of the guidance on the 2016 401(k) plan limits is provided below. However, the limitations did not change for 2016 because the increase in the cost-of-living index did not meet the statutory thresholds that trigger their adjustment.

Limits on Participant Contributions:

A 401(k) plan participant may make 401(k) deferrals up to a maximum of $18,000 during 2016. This limit is sometimes referred to as the “elective deferral limit” or the “402(g) limit.” The law also allows participants who are or will be age 50 by the end of the 2016 to elect to make additional deferrals, referred to as “catch-up contributions,” to a 401(k) plan up to a maximum of $6,000 during 2016.

Limit on Compensation Considered When Determining Employer Contributions: 

Employer contributions under a 401(k) plan may not be calculated based on compensation received by a participant that is in excess of the annual compensation limit. For 2016, the annual compensation limit remains at $265,000. It is important to note that most 401(k) plans allow a participant to continue making 401(k) deferrals after they have reached the annual compensation limit; however, a 401(k) plan may be written to apply the compensation limit to all contributions under the plan, including 401(k) deferrals. 

Maximum Contributions to 401(k) Plan: 

In addition to limiting the amount of 401(k) deferrals and catch-up contributions that a participant may make under a 401(k) plan, the IRS puts a limit on the total contributions that may be made to a 401(k) plan for each participant. For 2016, the annual contribution limit will be the lesser of 100% of the participant’s 2016 compensation or $53,000.  This limit remains unchanged from 2015.

Compliancedashboard will continue to be updated as new guidance is released.