Tax Article - Qualified Pension Plan Contributions for 2007

The IRS announced revised dollar limitations for pension plans and related amounts for calendar-year 2007. Some amounts changed due to cost-of-living adjustments, while other changes were Code-required. Included in this article are the contribution limits of particular importance for 2007.

Note that the statutory provisions for Section 401(k), Section 403(b), Section 408(k), and Section 457 plans, allow a “new” substitute limit of $20,500 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 were 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 $23,500 in 2007.

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 increases to $31,000 ($15,500 x 2) for 2007.

For 2007, 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.

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