Most Benefit Plan Limits
Unchanged for Second
Consecutive Year
October 2010
Date
Aon Hewitt
© 2010 – Aon Corporation
Brief Description: For the second consecutive year, most IRS benefit plan limits and
Social Security benefits and thresholds remained unchanged from the prior year. In this
article we look at the implications of this unusual occurrence for 2012.
For the second consecutive year, most IRS benefit plan limits and Social Security benefits and thresholds
will not change for 2011. In this article, we examine the current situation and look ahead to possible 2012
implications.
Inflation Indexing
Social Security and many benefit plan limits are indexed to inflation, as measured from the third quarter of
one year to the next. Both the CPI-U (used for IRS benefits limits) and the CPI-W (used to determine
Social Security cost-of-living adjustments) show a similar pattern over the past two years, dropping
unprecedentedly (1.6% and 2.1% respectively) during 2009, then rising modestly (1.2% and 1.5%,
respectively) during 2010, leaving the indices about a half-percent below their 2008 “high-water” mark.
Therefore, for 2011, there will again be no cost-of-living increase to Social Security recipients in payment
status, and for benefit plan purposes, most limits will remain at their 2010 (and 2009) levels.
Looking ahead to 2012, as suggested above, CPI will need to increase about a half percent from current
levels just to regain the third quarter 2008 peaks. Only inflation in excess of this will be captured in the
2012 increases a year from now.
Many IRS benefit plan limits are rounded and therefore increase only based on “threshold” inflation levels.
The table below summarizes the key limits and the inflation needed in the coming year to produce an
increase an in the limit.
Key Benefit Plan
Limitations
Defined benefit dollar
limit [415(b)]
Rounded threshold
Unrounded
Defined contribution
dollar limit [415(c)]
Rounded threshold
Unrounded
401(k) deferral limit
[402(g)]
Rounded threshold
Unrounded
Catch up contribution
limit [414(v)]
Rounded threshold
Unrounded
2010
2011
Next
Threshold
Inflation
Needed to
Increase
$ 195,000
$ 195,000
196,448
$ 200,000
1.9%
49,000
49,000
50,000
1.9%
17,000
2.4%
6,000
9.0%
49,112
16,500
16,500
16,629
5,500
5,500
5,543
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Key Benefit Plan
Limitations
Qualified plan
compensation limit
[401(a)(17)]
Rounded threshold
Unrounded
Highly compensated
employee threshold
[414(q)]
Rounded threshold
Unrounded
2010
2011
Next
Threshold
Inflation
Needed to
Increase
245,000
245,000
245,560
250,000
1.9%
110,000
110,000
115,000
3.9%
110,952
Wage Indexing
Apart from the inflation-indexing discussed above, some pension and Social Security-related items are
adjusted for increases in the “average wage index” as calculated by the Social Security Administration
(SSA). Whereas inflation indexing reflects a one-year lag (inflation in the prior year drives adjustments in
the following year), the wage indexing calculations are not as timely, producing a second year of lag. For
example, the increase in wages between 2008 and 2009 has just now been released – this is the
increase used to make pre-retirement adjustments to the Social Security formula for 2011.
Like the CPI, the average wage index dropped (by about 1%) during 2009. Like the CPI, this drop was
unprecedented. Unlike the inflation-indexing discussed above, however, elements of the Social Security
formula, (such as the “bend points” used to determine benefit amounts) are not precluded from
decreasing. For those becoming eligible for Social Security in 2011, the formula basis will produce slightly
lower benefits ($5-$10 per month) than the one used for the 2010 “cohort”, reflecting the drop in the
average wage index.
On the financing side, the Social Security taxable wage base is also tied to the average wage index, but
includes an override of no increase in the event of no cost of living increase for Social Security benefits.
So, that amount ($106,800 for 2009 and 2010) will remain unchanged in 2011. Looking ahead to 2012,
the wage base index is poised to increase to $108,300, even if the 2010 average wage index is the same
as 2009. Changes in the average wage index during 2010 will affect the increase, but the CPI override
could apply again in 2012, if inflation in the current year is less than 0.6% (since such an increase would
not be enough to produce a Social Security cost of living increase for 2012). In this case, the taxable
wage base would remain at $106,800 for 2012.
Finally, various Pension Benefit Guaranty Corporation (PBGC) amounts are also tied to wage indexation,
with some interesting results. On one hand, the PBGC maximum guaranteed benefit remains at $4,500
per month for 2011 and will increase in 2012 only if the Social Security taxable wage base increases.
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The PBGC’s per-participant flat-rate premium, which is tied to changes in the underlying average wage
index but is precluded from decreasing, will remain at $35 for 2011. The premium rate will increase to $36
in 2012 if the average wage index increases at least 3.1% during 2010.
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Contact Information
Brian Donohue
Senior Vice President
Aon Hewitt
+1.312.381.5674
brian.donohue@aonhewitt.com
John Lowell
Vice President
Aon Hewitt
+1.404.264.3088
john.lowell@aonhewitt.com
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