NCPA - National Center for Policy Analysis

IRS COULD CUT LIMITS ON 401(K) ALLOCATIONS

August 28, 2009

The Internal Revenue Service (IRS) will announce 2010 contribution limits for 401(k) and IRA plans in October.  Unless inflation picks up in August and September, the IRS could be forced to reduce the limits, says columnist Sandra Block.

  • For 2009, most workers can contribute up to $16,500 to their 401(k) plans, plus an additional $5,500 if they're 50 or older.
  • In 2010, these limits could be reduced to $16,000 and $5,000, according to an analysis by Mercer, a human resources consultant.

The IRS is reviewing the relevant law, IRS spokeswoman Nancy Mathis said in an e-mail.  With some inflation figures still outstanding, it's too early to speculate on limits for 2010, she said.  In September 2008, inflation was 4.94 percent, because of energy costs.  It's been negative since March, says Block.

The average 401(k) plan fell 27 percent in 2008, Fidelity Investments says.  Any reduction in the amount workers can save -- at a time when they're struggling to recover from painful bear market losses -- will spark a fierce political backlash, predicts John Carl, president of the Retirement Learning Center, a retirement-plan consultant.

Unless Congress changes the law, the IRS may have no choice, says Bill McClain, senior consultant for Mercer. "A strict interpretation of the code could lead them to believe that's their only option," he says.

A negative inflation rate also means that Social Security beneficiaries may not receive a cost-of-living adjustment in 2010 or 2011.  This would mark the first time seniors haven't received a cost-of-living increase since the adjustments were adopted in 1975.  The Social Security Administration will announce next year's adjustment in October.

Source:  Sandra Block, "IRS Could Cut Limits on 401(k) Allocations," USA Today, August 27, 2009.

For text:

http://www.usatoday.com/printedition/money/20090827/contributions27_st.art.htm

 

Browse more articles on Tax and Spending Issues