So we have the official word from the IRS on next year’s 415 limits, as previously noted here. But what if you wish to project an advance estimate of a future threshold, such as we did back here? When I forwarded inquiries about the innards of the little spreadsheet I’d been given over to my pet actuary, I was sent a copy of this IRS information letter from 1993.

For current thresholds that employ the same methodology as Code §415(d), one needs monthly CPI-U results for the applicable base period and for the year preceding the year for the limit, the original level for the threshold for the year following the base year, a rounding multiple comparable to the numbers given in 415(d)(4), and the particular calculation methodology used by the IRS (including a curious truncate-round two-step in the middle of the calculation).

Let’s walk it through several instructive examples from this year’s edition –

*Limitation on Annual Addditions to Defined Contribution Plan*, Code §415(d)(1)(C).- Base period is 2001. CPI-U index numbers for July, August, and September 2001 were 177.5, 177.5, and 178.3 respectively. The sum of those three numbers is 533.3.
- For the 2007 threshold, we need the comparable CPI-U numbers from 2006, which for July, August, and September 2006 were 203.5, 203.9, then quite surprisingly dropping to 202.9. The sum of those three numbers is 610.3.
- The ratio of the second sum to the first sum is something like 1.14438024 (i.e., 610.3/533.3, here carrying that result out to enough places to continue), but then here comes the odd little truncate-round two-step: (a) The 1.14438024 result is truncated to 5 decimal places, giving us 1.14438; then (b) That intermediate result is rounded to 4 decimal places, yielding 1.1444.
- For the threshold being adjusted, the original level in 2002 was $40,000, which is now multiplied by the truncated-rounded factor of 1.1444, giving $45,776, which doesn’t then require rounding to the nearest dollar since it is already an integer number of dollars.
- The truncating multiple for this particular threshold is $1,000. We round down, rather than to the nearest multiple, so dropping $45,776 down to the next lower $1,000 gives us $45,000 for the 2007 limitation on annual additions to a defined contribution plan.

That drop in this year’s CPI-U index from August to September dropped the result here from my original estimate of $46,000 to the ultimate actual ceiling of $46,000, serving as warning to anyone attempting to play actuary or economist with future inflation expectations.

*Limitation on Elective Deferrals*, Code §402(g)(1).- Base period this time is 2005, since EGTRRA hard-wired the recent years’ ceiling increases. CPI-U index numbers for July, August, and September 2005 were 195.4, 196.4, and 198.8 respectively. The sum of those three numbers is 590.6.
- For the 2007 threshold, we use the comparable CPI-U numbers for 2006 as described for the DC annual addition ceiling, yielding the same sum of 610.3 for the July-August numbers.
- Since we have a different base period, the ratio of the second sum to the first sum is of course different, looking something like 1.033355909, which truncated to 5 decimal places becomes 1.03335, which rounded to 4 decimal places turns into 1.0334.
- For the elective deferral threshold, the starting level is this year’s $15,000, which is now multiplied by the truncated-rounded factor of 1.0334, giving $15,501, which doesn’t then require rounding to the nearest dollar since it is already an integer number of dollars.
- The truncating multiple for the elective deferral limit is $500. Rounding $15,501 down to next lower $500 gives us $15,500 for the 2007 limitation on elective deferrals.

We just barely made that increase! A smidge more of a drop in September’s CPI-U (or comparably different numbers in others of the 6 quarters used for the indexing), and we might have remained at $15,000 for 2007, instead of jumping up to actual ceiling of $15,500, echoing the warning expressed earlier.

*Limitation on 401(k) Catch-Up Contributions*, Code §414(v)(2)(C).- Base period for this is also 2005, so the first step here repeats what we did for elective deferrals.
- Ditto.
- Ditto.
- But here, the starting level is this year’s $5,000, which is then multiplied by the truncated-rounded factor of 1.0334, giving us $5,167, which again doesn’t then require rounding to the nearest dollar since it is already an integer number of dollars.
- Although in 2006 the catch-up deferral ceiling is at one-third the level of the elective deferral ceiling, the truncating multiple is the same: $500. Rounding $5,167 down to next lower $500 leaves us at $5,000 for the 2007 limitation on catch-up contributions, and will likely continue to do so for several more years.

In this instance, although the same warning about future projections, as expressed for the previous two calculations, still does hold (particularly when the unrounded amount nears $5,500 several years from now), for 2007 we were rather safe in expecting that number to remain the same as for 2006.

Actually, there’s no official word that the IRS is still using exactly the same methodology (updated to use 3rd-quarter comparisons and to step up in terms of the rounding multiples, both of which were introduced after the 1993 IRS letter), or is there any particular guarantee that future methodology will remain the same. For all years since 1993, however, I’m told that this methodology has precisely reproduced all of the official figures published by the IRS, even when there were close calls such as this years $15,501. So unless and until anything more formal is published, this looks good enough for my needs.

(P.S. – In case I haven’t made it rather obvious by now, I absolutely adore what Cornell has done with its U.S. Code!! And as far as I can tell so far, all without making the blunder that some websites make of wrecking all of the links you had previously made to their material. Quite commendable.)

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