New Social Security and Retirement Plan Adjustments for 2004

The Social Security Administration has announced the 2004 cost-of-living adjustments for Social Security taxes and benefits. Similarly, the Internal Revenue Service has released the cost-of-living adjustments for several retirement plan limits. Other retirement-plan-related limits will be increased automatically due to tax law provisions enacted in 2001.

Social Security Adjustments

The Social Security limits that have been adjusted include:

Wage Base.— The taxable wage base on which Social Security taxes are imposed rises from $87,000 in 2003 to $87,900 in 2004. The combined Social Security and Medicare tax rate remains at 7.65%, for both employers and employees, and is applied to wages up to the taxable wage base amount. The Medicare tax portion (1.45%) alone applies to wages above the taxable wage base. For self-employed individuals, the combined rate of 15.3% remains in place for 2004, with the 2.9% Medicare tax alone applied to amounts over the taxable wage base.

Earnings Limit.— In 2004, the maximum amount an individual who is younger than the normal retirement age and is receiving early Social Security benefits can earn without reducing those benefits is $11,640 a year ($970 a month). Benefits are reduced $1 for every $2 in earnings over the limit.

During the calendar year that an individual reaches normal retirement age (but prior to that date), he or she can earn as much as $2,590 a month without reducing benefits for the year. Benefits are reduced $1 for every $3 of earnings over the limit. No earnings limit applies beginning in the month normal retirement age is attained.

Normal retirement age for Social Security purposes ranges from 65 years, four months (for those born in 1939) to age 67 (for those born in 1960 and later), depending on year of birth.

Benefits.— Starting in January 2004, Social Security benefits will rise by 2.1%.

Retirement Plan Adjustments

The following retirement plan limits are increased by statute for 2004:

Elective Deferrals.— The 2003 limit of $12,000 on elective deferrals to a 401(k) salary deferral plan, 403(b) annuity, Simplified Employee Pension, or a 457 deferred compensation plan increases to $13,000 for 2004. Maximum deferrals to a SIMPLE plan increase from $8,000 in 2003 to $9,000 in 2004.

Catch-up Contributions.— Special catch-up contributions to qualifying plans by individuals age 50 or older are increased from $2,000 in 2003 to $3,000 in 2004, except for contributions to SIMPLE plans, where the limit rises from $1,000 in 2003 to $1,500 in 2004.

The following limits are increased for inflation for 2004:

Defined Contribution Plan Limit.— The limit on annual additions (employer and employee contributions and forfeitures) to a defined contribution plan (a 401(k) plan or profit sharing plan, for example) increase from $40,000 in 2003 to $41,000 in 2004.

Defined Benefit Plan Limit.— The limit on the annual benefit that may be funded under a defined benefit pension plan rises from $160,000 in 2003 to $165,000 in 2004.

Annual Compensation Limit.— The maximum amount of compensation that can be considered for purposes of computing contributions and benefits to a retirement plan increases from $200,000 in 2003 to $205,000 in 2004.

Other limits, such as the dollar limit for defining a key employee ($130,000) and for determining a highly compensated employee ($90,000), remain the same for 2004.

Employers do not need to seek IRS approval for making these yearly adjustments to their plan limits.

Summary

The changes in the Social Security and retirement plan limits will have an impact on nearly everyone who employs others or who is an employee or a retiree. Employers and employees will see higher Social Security tax payments when earnings exceed the taxable wage base. Retirees should see an increase in Social Security benefits. And participants in most employer-sponsored retirement plans will have an opportunity to put more money away for retirement.

If you are planning for retirement, the new retirement plan limits can make it easier to meet your goals. If you need help understanding how the new limits fit into your retirement planning, we are ready to assist. Contact us today.

The information provided in the newsletter has been obtained from sources believed to be reliable but its accuracy is not guaranteed.