Whether you already have a qualified retirement plan in place or are thinking of starting one for 2018, now is a good time to familiarize yourself with changes effective next year.
Each year, the IRS adjusts various amounts related to qualified retirements. Key updates to note for 2018 include:
- Maximum contributions to defined benefit plans, such as profit-sharing plans: $55,000 (up from $54,000 in 2017)
- Maximum benefits taken into account in figuring contributions to defined benefit (pension) plans: $220,000 (up from $215,000 in 2017)
- Maximum amount of compensation taken into account in figuring contributions: $275,000 (up from $270,000 in 2017)
- Maximum salary reduction contribution to a 401(k) plan: $18,500 (up from $18,000 in 2017). However, the additional catch-up contribution for those who are age 50 and older at year end remains $6,000. Thus, for example, the top amount that a 58-year old employee can contribute to her 401(k) account in 2018 is $24,500.
- Maximum salary reduction contribution to a SIMPLE-IRA remains at $12,500 ($15,500 for those who are age 50 or older by year end).
Notice to employees
If you offer a 401(k) or similar plan, you must provide your employees with notice about:
- Changes, if any, in the plan.
- Whether they are eligible to participate.
- Information on a salary reduction contribution (a pre-tax contribution withheld from their paycheck). This includes the new limitation for 2018 as well as any changes in their contribution percentage if you have an automatic 401(k) plan.
The notice with respect to automatic enrollment in an Eligible Automatic Enrollment Arrangement (EACA) or a Qualified Automatic Enrollment Arrangement (QACA) must be given at least 30 days but no more than 90 days before employees are automatically enrolled in such a plan.
For any newly-hired employee, notice must be given on the date he or she is hired. For SIMPLE-IRAs, the notice period generally is 60 days before the start of the year (November 2).
Set up a plan
If you don’t yet have a plan for 2017, you can still set one up by signing the paperwork with the financial institution where you are going to maintain it. This will allow you to complete 2017 contributions up to the extended due date of your 2017 income tax return. If you don’t do this by December 31, 2017, you’ll still be permitted to create a SEP for 2017 and make contributions to it by the extended due date of your 2017 return.
Work with a benefits expert
Having a qualified retirement plan is a smart thing to do for your business, allowing tax breaks for contributions while helping employees save for retirement. However, the entire area of setting up and maintaining a plan is a mine field. If you get it wrong, it can result in penalties, plan disqualification, and premature taxation to employees. Consult a benefits expert to be sure you’re handling your responsibilities for the plan.