IRS 2018 Benefit Plan Limit Adjustments Include Limits for QSEHRAs

Practical Law Legal Update w-011-0097 (Approx. 10 pages)

IRS 2018 Benefit Plan Limit Adjustments Include Limits for QSEHRAs

by Practical Law Employee Benefits & Executive Compensation

Retirement Plan Limits (Notice 2017-64)

Under Notice 2017-64, for the 2018 tax year:

The elective deferral limit under Section 402(g)(1) of the Internal Revenue Code (Code) will increase from $18,000 to $18,500 for employees who participate in:
- Code Section 401(k) plans (see Practice Note, Contributions to a Defined Contribution Plan: Limits on Contributions);
- Code Section 403(b) plans (see Practice Note, Code Section 403(b) Plans: Overview); and
- most Code Section 457 plans (see Practice Note, Executive Compensation for Tax-Exempt Organizations).
The catch-up contribution limit for those age 50 and over under Code Section 414(v)(2)(B)(i) (26 U.S.C. § 414(v)(2)(B)(i)) will remain unchanged at $6,000. The catch-up contribution limit for those age 50 and over under Code Section 414(v)(2)(B)(ii) (26 U.S.C. § 414(v)(2)(B)(ii)) will remain unchanged at $3,000 (see Practice Note, Contributions to a Defined Contribution Plan: Limits on Contributions).
The limitation on the annual benefit for a defined benefit plan under Code Section 415(b)(1)(A) (26 U.S.C. § 415(b)(1)(A)) will increase from $215,000 to $220,000.
The limitation on annual additions to a participant's defined contribution plan under Code Section 415(c)(1)(A) (26 U.S.C. § 415(c)(1)(A)) will increase from $54,000 to $55,000 (see Practice Note, Contributions to a Defined Contribution Plan: Limits on Contributions).
The annual compensation limit under Code Section 401(a)(17) (26 U.S.C. § 401(a)(17)) will increase from $270,000 to $275,000.
The limitation used in the definition of highly compensated employees (HCEs) under Code Section 414(q)(1)(B) (26 U.S.C. § 414(q)(1)(B)) will remain unchanged at $120,000 (see Standard Clause, Plan Language, Definition of Highly Compensated Employee).
The limitation used in the definition of a key employee in a top-heavy plan under Code Section 416(i)(1)(A)(i) (26 U.S.C. § 416(i)(1)(A)(i)) will remain unchanged at $175,000.
The dollar amount under Code Section 409(o)(1)(c)(ii) (26 U.S.C. § 409(o)(1)(c)(ii)) for determining the maximum account balance in an employee stock ownership plan (ESOP) subject to a five-year distribution period will increase from $1,080,000 to $1,105,000. The dollar amount used to determine the lengthening of the five-year distribution period will increase from $215,000 to $220,000. The limit under Code Section 664(g)(7) (26 U.S.C. § 664(g)(7)) concerning the qualified gratuitous transfer of qualified employer securities to an ESOP will increase from $45,000 to $50,000 (see Practice Notes, Employee Stock Ownership Plans (ESOPs) and Employee Stock Ownership Plans: Winding Down an ESOP).
The compensation amount under Code Section 408(k)(2)(C) (26 U.S.C. § 408(k)(2)(C)) regarding simplified employee pensions (SEPs) will remain unchanged at $600 (see Practice Note, Simplified Employee Pensions (SEPs) and Salary Reduction Simplified Employee Pensions (SARSEPs)).
The limitation under Code Section 408(p)(2)(E) (26 U.S.C. § 408(p)(2)(E)) regarding SIMPLE retirement accounts will remain unchanged at $12,500 (see Practice Note, Savings Incentive Match Plan for Employees Individual Retirement Accounts (SIMPLE IRAs): Employee Contribution to a SIMPLE IRA).

Notice 2017-64 provides that the threshold used to determine whether a multiemployer plan is a systematically important plan under Code Section 432(e)(9)(H)(v)(III)(aa) (26 U.S.C. § 432(e)(9)(H)(v)(III)(aa)) will increase from $1,012,000,000 to $1,087,000,000 (see Practice Note, Multiemployer Pension Plans).

Notice 2017-64 also discusses the increases in the adjusted gross income limitation under Code Section 25B(b)(1)(A) (26 U.S.C. § 25B(b)(1)(A)) for determining the retirement savings contribution credit.

For more information on dollar limits for retirement plans, see Practice Note, Requirements for Qualified Retirement Plans.

Limits Related to Health Plans (Revenue Procedure 2017-58)

In Rev. Proc. 2017-58, the IRS announced cost-of-living adjustments for 2018 for numerous tax provisions, including limits affecting health and welfare plans and arrangements. Under Rev. Proc. 2017-58:

The dollar limit on employee salary reduction contributions to health flexible spending arrangements (health FSAs) is $2,650 (an increase of $50 from the 2017 limit) (see Practice Note, Cafeteria Plans: Dollar Limit on Employee Salary Reduction Contributions to Health FSAs).
The maximum credit allowed for adoption of a child is $13,840 (an increase of $270 from 2017). The adoption credit begins to be phased out for individuals with modified adjusted gross incomes of more than $207,580 (for 2017, this amount is $203,540), and is completely phased out for individuals with modified adjusted gross incomes of $247,580 or more (for 2017, this amount is $244,540 or more). Both phase-out adjustments are an increase of $4,040 over their 2017 counterparts (see Practice Note, Fringe Benefits: Adoption Assistance Programs).
The maximum amount that can be excluded from an employee's gross income for the adoption of a child under an employer's adoption assistance program is $13,840 (an increase of $270 from 2017). As with the adoption credit, the exclusion begins to be phased out for individuals with modified adjusted gross incomes of more than $207,580 (for 2017, this amount is $203,540), and is completely phased out for individuals with modified adjusted gross incomes of $247,580 or more (for 2017, this amount is $243,540 or more). Both phase-out adjustments are an increase of $4,040 over their 2017 counterparts (see Practice Note, Fringe Benefits: Adoption Assistance Programs).
The monthly limits for qualified transportation fringe benefits are as follows:
- the aggregate monthly limit for transit passes and transportation in a commuter highway vehicle is $260 (an increase of $5 from 2017); and
- the monthly limit an individual can exclude for qualified parking is $260 (an increase of $5 from 2017) (see Practice Note, Fringe Benefits Under Code Section 132: Qualified Transportation Benefits).
Regarding Archer medical savings accounts (Archer MSAs), a high-deductible health plan (HDHP) (self-only coverage) is a health plan with an annual deductible that is:
- not less than $2,300 (up from $2,250 for 2017); and
- not more than $3,450 (up from $3,350 for 2017).

Annual out-of-pocket expenses for covered benefits must not exceed $4,600 (up from $4,500 for 2017) (see Practice Note, Defined Contribution Health Plans: Overview: Archer Medical Savings Accounts (Archer MSAs)).

Also regarding Archer MSAs, an HDHP (family coverage) is a health plan with an annual deductible that is:
- not less than $4,600 (up from $4,500 for 2017); and
- not more than $6,850 (up from $6,750 for 2017).

Annual out-of-pocket expenses for covered benefits must not exceed $8,400 (up from $8,250 for 2017).

Under the Affordable Care Act's (ACA's) small business health care tax credit, the maximum credit is phased out based in part on an employer's average annual wages in excess of $26,700 for 2018 (an increase of $500 from 2017). The $26,700 amount also is used in calculating who is an eligible small employer for the credit (see Practice Note, Small Business Health Care Tax Credit Under the ACA).

ACA Premium Tax Credit

The ACA includes a refundable tax credit (known as the premium tax credit (PTC)) for eligible individuals and families who purchase health insurance through an ACA exchange (26 U.S.C. § 36B; see Practice Note, Affordable Care Act (ACA) Overview). Taxpayers who meet certain criteria may have some or all of their estimated PTC paid to the insurer in advance. However, if a taxpayer's advance credit payments are more than the actual PTC, the taxpayer owes the excess credit as a tax. For 2018, some of the limits on the tax for excess advance payments of the PTC are higher than the limits for tax years beginning in 2017.

The following limits apply for taxable years beginning in 2018:

If household income is less than 200% of the federal poverty line (FPL), the limits are:
- $300 for unmarried individuals (other than surviving spouses and heads of households) (unchanged from 2017); and
- $600 for all other taxpayers (also unchanged from 2017).
If household income is at least 200%, but less than 300%, of the FPL, the limits are:
- $775 for unmarried individuals (up from $750 in 2017) (other than surviving spouses and heads of household); and
- $1,550 (up from $1,500 in 2017) for all other taxpayers.
If household income is at least 300%, but less than 400%, of the FPL, the limits are:
- $1,300 for unmarried individuals (up from $1,275 in 2017) (other than surviving spouses and heads of household); and
- $2,600 for all other taxpayers (up from $2,550 in 2017).

ACA Individual Mandate Penalty

For the 2018 calendar year, the dollar amount used to determine the penalty for individuals who do not maintain minimum essential coverage (MEC) for purposes of the ACA's individual mandate is $695 (which is unchanged from 2017) (26 U.S.C. § 5000A; see Practice Note, Affordable Care Act (ACA) Overview: Individual Mandate).

Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs)

For the first time, the IRS's annual cost-of-living adjustments include adjusted limits for qualified small employer health reimbursement arrangements (QSEHRAs). As background, the 21st Century Cures Act (Pub. L. 114-255) permits small employers to provide QSEHRAs to eligible employees. Under a QSEHRA, payments or reimbursements generally can be made to eligible employees for medical care expenses (under Code Section 213(d), and including expenses for individual health insurance policy premiums) incurred by the employee or the employee's family members (26 U.S.C. § 9831(d); 26 U.S.C. § 213(d)). Annual payment and reimbursement limits under a QSEHRA are adjusted for inflation for years beginning after 2016. (For more information on QSEHRAs, see Legal Updates, Rules for QSEHRAs, EPPs, and HRAs at Issue in Latest FAQ Guidance and IRS Extends Deadline for QSEHRA Initial Notices.)

For tax years beginning in 2018, total payment and reimbursement amounts for the year under a QSEHRA cannot exceed:

$5,050 (increased from $4,950 under Code Section 9831(d)).
$10,250 for family coverage (increased from $10,000 under Code Section 9831(d)).

PBGC Premiums

The PBGC recently announced updated PBGC premium rates for plan years beginning in 2018, which reflect the increases and indexing required by ERISA Section 4006 (29 U.S.C. § 1306), as amended by the Bipartisan Budget Act of 2015 (see Legal Update, Bipartisan Budget Act of 2015 Includes Pension Funding Provisions and Repeals Automatic Enrollment Under the ACA). Specifically:

The per-participant flat premium rate will increase from $69 to $74 for single-employer plans (as provided by the Bipartisan Budget Act of 2015) and will remain unchanged at $28 for multiemployer plans.
The variable-rate premium (VRP) for single-employer plans will increase from $34 to $38 per $1,000 of unfunded vested benefits (UVBs).
The VRP cap will increase from $517 to $523, multiplied by the number of participants. The PBGC indicated that plans sponsored by small employers (small employers generally have fewer than 25 employees) may be subject to a lower cap. Multiemployer plans do not pay a VRP.

In 2019, as provided by ERISA Section 4006 (29 U.S.C. § 1306) the per-participant flat premium rate will increase by $6 (to $80) for single-employer plans, and the VRP for single-employer plans will increase by $4 and will be subject to indexing based on increases in the National Average Wage Index (NAWI). The VRP cap and the per-participant flat premium rate for multiemployer plans will also be subject to indexing based on increases in the NAWI.

Social Security Wage Base

On October 13, 2017, the Social Security Administration (SSA) announced that the Social Security taxable wage base for 2018 will increase to $128,700, from $127,200 in 2017. (In November 2017, SSA revised the Social Security taxable wage base for 2018 to $128,400 (see Legal Update, Social Security Administration Updates Taxable Wage Base for 2018).)

IRS 2018 Benefit Plan Limit Adjustments Include Limits for QSEHRAs | Practical Law