Blogging Employee Benefits

August 16, 2006

Expect $15,500 Elective Deferral Cap for 2007

Filed under: 401(k), Pensions — Fuguerre @ 4:26 pm

But without getting overbearing with my cautious side, as much as ever slap this weblog’s Disclaimer on that speculation.

The point being that the Bureau of Labor Statistics gave us the July 2006 CPI-U this morning. Now under IRC §402(g)(4) as added by EGTRRA, we technically will want those CPI-U numbers for August 2006 and September 2006 before we have all of the pieces we need to make this official; so we won’t see a formal announcement from the IRS for another two months or so. But given the methodology of IRC §415(d) referenced in 402(g)(4) and given July’s CPI-U, we’d need deflation for the next two months in order to have a third quarter that would keep the 2007 elective deferral limit flat at $15,000 — it actually wouldn’t take a great deal of deflation, but don’t count on the price of oil letting us off that easy. Conversely, we’d need the annualized inflation rate to go ballistic up to more than 40% for each of the next two months in order to jump up to a deferral limit of $16,000, and the Fed would shoot the economy before that would happen. So with the almost impossible chance that a brief September lull could keep us flat at this year’s level, and again remembering that this won’t be official until the IRS says so, look for the 2007 limit on elective deferrals to increase to $15,500.

Other threshold’s COLAs are closer to straddling lines that can go either way. The maximum benefit under IRC §415(b) will quite likely increase from this year’s $175,000 to $180,000 — there too, we’d need a pinch of deflation for that not to increase, while a higher jump is next to impossible. But while I’d put my money on $46,000 for the §415(c) limit on contributions (up from $44,000) and $230,000 for the §401(a)(17) compensation limit (up from $220,000), some further moderation of inflationary pressures during the rest of the quarter could make those two come in at $45,000 and $225,000 respectively.

Update: See my 10/18 post reflecting full 3rd quarter CPI.

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4 Comments »

  1. Any crystal ball on whether the 401k “Catch-Up” limit will change for 2007?

    Comment by Page Stowers — August 17, 2006 @ 3:19 pm

  2. Good job! Thanks for doing this work so I don’t have to. Just like you said, there gets to be point in the year where you need stable prices or deflation not to have the limit increase; and ridiculous inflation for it to go to the next increment.

    Comment by Jim — August 17, 2006 @ 4:52 pm

  3. The little spreadsheet I was given for COLAs covers only the four thresholds discussed in this post. And my trusted actuarial colleague has been largely inaccessible this month. But my own crystal ball says the catch-up limit will remain constant at $5,000 for 2007, since we would have needed inflation of 10% or more from third quarter 2005 to third quarter 2006 in order to climb the $500 step required for COLAs to the catch-up deferral under 414(v).

    Comment by Fuguerre — August 22, 2006 @ 4:46 am

  4. […] With the BLS reporting the September 2006 CPI this morning, I can finalize my previous estimates of COLAs for key pension thresholds. These numbers remain unofficial, since of course only the IRS has the authority to publish the official numbers. But relying on the same rounding conventions used by the agency for prior years, the numbers I expect to see are as follows – […]

    Pingback by 2007 Pension Thresholds « Pensions & Benefits Weblog — October 18, 2006 @ 8:35 am


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