Fri, September 04, 2009
Will 401(k) Contribution Limits Drop in 2010?
Each year, contribution limits on 401(k)s, IRAs and other retirement plans are adjusted to keep up with inflation. However, because of a quirk in the rules that define how limits on 401(k) and pension plan contributions are calculated, it’s possible that 2010 limits on these plans could actually decline from current levels.
By law, Social Security benefits (which are also adjusted for inflation) cannot decline. But as human resources consulting firm Mercer notes, it’s unclear how the IRS will interpret the 401(k) and pension regulations in the present circumstances. Normally contribution limits for these plans are adjusted for inflation based on the annual urban Consumer Price Indes (CPI-U) change as of the end of the third quarter of the previous year. As it happens, the CPI spiked at the end of Q3 2008 and then dropped for several months; it is still below that level. It’s likely that the annual Q3-to-Q3 change will therefore be negative as of the end of this month.
The IRS may interpret the rules as allowing them to leave contribution limits at 2009 levels, or they may actually reduce the limits. Because HSAs, IRAs, and other savings plan limits are determined by CPI changes calculated at a different time in the calendar year, those limits are not in danger of being lowered.
In practical terms, the possibility of a drop for 401(s) matters most for the minority of workers who max out their plans, but a drop would also mean that future contribution limit increases would be calculated from a lower baseline level. The IRS’s decision on 2010 contribution limits should be announced on October 15th.
Related Post:
Consumer Price Index Suggests Inflection Point