Tax Researcher
November 2008
SOCIAL SECURITY TAXABLE WAGE LIMIT INCREASED FOR YEAR 2009
On October 16, 2008, the Social Security Administration announced an upward cost-of-living adjustment for the Social Security taxable wage limit. For year 2009, the amount of earnings taxable for Social Security (Old Age, Survivors and Disability Insurance, or "OASDI") will increase from $102,000 to $106,800. However, the tax rate will remain unchanged from year 2008 to 2009, at 6.2%. With this increase in taxable wages, the maximum Social Security tax payable by an employee will be $6,621.60, an increase of $297.60 from the current maximum tax of $6,324.00. Employers will continue to match the employee's contribution.
Regarding Medicare tax, in 1993 the Omnibus Budget Reconciliation Act removed the taxable wage limit for the Medicare tax, for 1994 and years thereafter. Thus, for year 2009 again there will be no maximum employee contribution amount for Medicare tax. All covered wages will be subject to Medicare tax at the same 1.45% rate as in 2008. Employers will continue to match employee Medicare contributions, using the same tax rate and taxable wage amounts as the employees.
The combined rate of 7.65% (6.20% for Social Security and 1.45% for Medicare) thus continues for the year 2009, without change. This tax rate was last changed in 1990, when it went from 7.51% to 7.65%.
QUALIFIED PENSION PLAN CONTRIBUTION LIMITS INCREASE FOR 2009
In 2001, legislation was signed into law that increased the amounts which may be contributed to 401(k) and other employer-sponsored tax-deferred retirement plans.
The law made extensive changes to the deferral limits for employer-sponsored tax-deferred retirement plans, superseding many cost-of-living adjustments already provided by the Internal Revenue Code. Below are the contribution limits of particular importance for 2009 .
Plan |
2008 |
2009 |
401(k) |
$15,500 |
$16,500 |
401(k) new "catch-up" substitute limit |
$20,500 |
$22,000 |
403(b) (annuity) |
$15,500 |
$16,500 |
403(b) new "catch-up" substitute limit |
$20,500 |
$22,000 |
403(b) old "catch-up" substitute limit |
$23,500 |
$25,000 |
408(k) (SEP) |
$15,500 |
$16,500 |
408(k) (SEP) new "catch-up" substitute limit |
$20,500 |
$22,000 |
408(p) (SIMPLE) |
$10,500 |
$11,500 |
408(p) new "catch-up" substitute limit |
$13,000 |
$14,000 |
457 |
$15,500 |
$16,500 |
457 new "catch-up" substitute limit |
$20,500 |
$22,000 |
457 old "catch-up" substitute limit |
$31,000 |
$33,000 |
501(c) |
$15,500 |
$16,500 |
Note that the statutory provisions for Section 401(k), Section 403(b), Section 408(k), and Section 457 plans, allowed a new substitute limit ($20,500 in 2008 and $22,000 in 2009) for “catch-up” contributions by certain individuals. An employee is eligible to make these "catch-up" contributions if the employee is otherwise eligible to make elective deferrals under the plan, and is age 50 or older. A participant who is projected to attain age 50 before the end of a calendar year is deemed to be age 50 as of January 1 of that year. However, this is an optional provision that first must be elected by the pension plan sponsor (employer).
For Section 403(b) annuity plans, there was already a special "catch-up" election for employees who have completed at least 15 years of service with a "qualified organization." Such employees are allowed to contribute an additional $3,000 annually. Therefore, employees age 50 or older, who have completed at least 15 years of service, may contribute up to $25,000 in 2009.
In the case of a Section 457 plan, the new "catch-up" rule does not apply during the participant's last three years before retirement, if the plan has a previous "catch-up" provision. In the final three years of employment, under the previous "catch-up" provision, the regularly applicable limit is doubled. Therefore, for such employees in their final three years, the "catch-up" limit is $33,000 ($16,500 x 2) for 2009.
For 2009, employers are required to report participants' elective pension deferrals on Form W-2 in Box 12 using codes D through H, and S. The I.R.S. indicated in Announcement 2001-93 that for employees' qualified "catch-up" contributions after 2001, employers must report the elective deferral "catch-up" contributions in the totals reported for Codes D through H, and S.
Generally, at the time of contribution, employee deferrals under the limits stated above are exempt from Federal income tax withholding, but Social Security and Medicare taxes normally apply. The contribution amounts also are includable in wages for FUTA tax purposes. However, employer-made contributions to a qualified plan, whether matching or not, are exempt from employment taxes.
IRS ANNOUNCES VARIOUS FEDERAL ANNUAL AMOUNTS AND LIMITS EFFECTIVE 1/1/09
Type |
2008 |
2009 |
Federal Withholding Allowance Amount |
$3,500 |
$3,650 |
Adoption Assistance Limit |
$11,650 |
$12,150 |
Qualified Transportation Limit: |
|
|
Transportation/Transit Passes |
$115 |
$120 |
Qualified Parking |
$220 |
$230 |
Bicycle Commuting (per month) |
N/A |
$20 |
Health Savings Account Limits: |
|
|
Self Only Coverage |
$2,900 |
$3,000 |
Family Coverage |
$5,800 |
$5,950 |
Catch-Up Contributions 55 or Older |
$900 |
$1,000 |
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TAX RESEARCHER is distributed with the understanding that the publisher is not rendering legal, accounting or other professional services. If such advice or assistance is required, an attorney or accountant should be consulted. This newsletter is published monthly by Statutory Research, a department of the Employer Services Division. Comments should be addressed to ADP, Inc., Statutory Research Department, One ADP Boulevard (M/S 364), Roseland, New Jersey 07068. Copyright 2008 ADP, Inc.