by Stacey L. Spencer, QKA | Manager, Employee Benefit Services Group
The Social Security Administration (SSA) recently announced cost-of-living adjustments (COLAs) for 2012. The purpose of the COLA is to ensure that the purchasing power of Social Security and Supplemental Security Income (SSI) benefits is not drained by inflation. It is based on the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of the last year a COLA was determined to the third quarter of the current year. If there is no increase, there can be no COLA.
The CPI-W is determined by the Bureau of Labor Statistics in the Department of Labor. By law, it is the official measure used by the Social Security Administration to calculate COLAs.
In 2009, 2010, and 2011, the increase was not sufficient to trigger an increase in the maximum contribution. However, for 2012, there are some increases, and these increases are important for those who like to maximize their savings and decrease their income tax bill.
For 2012, following are the annual contribution limits for some popular retirement savings vehicles:
- 401(k)s, 403(b)s, most 457 plans, Thrift Savings Plan (TSP) – $17,000 with an additional $5,500 catch-up contribution allowed for those 50 or older. (2012 COLA: $500.)
- Traditional & Roth IRAs – $5,000 with an additional $1,000 catch-up contribution allowed for those 50 or older. (No 2012 COLA.)
- Simple IRAs – $11,500 with an additional $2,500 catch-up contribution allowed for those 50 or older. (No 2012 COLA.)
- SEP IRAs – $50,000 or 25% of an employee’s compensation, whichever is lesser. (2012 COLA: $1,000.)
- 415(b) defined benefit plans – the limitation on annual benefits under a defined benefit plan is increased to $200,000. (2012 COLA: $5,000.)
Other increases that employers should note: When it comes to defining “key employees” in a top-heavy plan, the determination limit goes up $5,000 to $165,000 in 2012. Also, the Social Security taxable wage base increases to $110,100 from $106,800 next year.