Defined Benefit Plan Limit
The annual benefit under a defined benefit plan increased from $165,000 to $170,000. This limit is used to determine the maximum annual benefit to a defined benefit plan on a participant's behalf. The annual benefit may not exceed the lesser of 100% of the average compensation of the participant's three highest-earning consecutive calendar years or $170,000.

Annual Addition for a Defined Contribution Plan
The limitation for defined contribution plans increased from $41,000 to $42,000. The contribution limit for each participant is 100% of the participant's compensation or $42,000, whichever is less. This limit applies to the maximum amount that may be contributed to any participant's account for the 2005 plan year, including employer contributions, such as profit-sharing contributions, employer-matching contributions, and other employer non-elective contributions and employee salary deferral contributions. The limit applies to profit sharing, money purchase pension, 401(k), target benefit, 403(b) plans, and SEP IRAs.

For plans with salary deferral features, such as 401(k) and 403(b) plans, the limit is increased by the catch-up amount of $4,000. This means that individuals who are at least age 50 by December 31, 2005, may receive up to $46,000 in contributions.

Compensation Cap
The compensation cap increased from $205,000 to $210,000. The compensation cap is the maximum compensation amount an employer may consider when determining a participant's contributions to the plan. For instance, if a participant earns $250,000, the employer can consider only $210,000 for plan purposes.

Key Employee Definition
The compensation determination for a key employee has increased from $130,000 to $135,000. When determining whether a plan is top-heavy, the plan administrator must consider the percentage of assets owned by key versus non-key employees. Generally, if key employees own more than 60% of plan assets, each non-key employee must receive a certain contribution amount to rectify the discrepancy. Employers should check the plan document to determine the definition of a key employee.

Highly Compensated Employee Definition
For purposes of defining a highly compensated employee (HCE), the limit has changed from $90,000 to $95,000. The definition of HCE is crucial in determining whether plan benefits are allocated to HCEs in a discriminatory manner compared to non-highly compensated employees. Employers should check the plan document to determine the definition of HCE.

SEP Compensation Eligibility
When determining whether an employee is eligible to participate in the employer's SEP, the employer usually considers the employee's age, years of service, and compensation. For this purpose, an employer may exclude employees who earn less than $450. This amount remains unchanged for the 2005 plan year.

Prescheduled Increases
The following are limits that were scheduled to increase under EGTRRA.
 

Phase-out Range for IRA Deductibility
Active participants must take their marital status and modified AGI into consideration when determining if they are eligible to claim a deduction for Traditional IRA contributions. For the 2005 tax year, the limits are as follows:

• For single filers, the limit changes from the $45,000-to-$55,000 range to the $50,000-to-$60,000 range.

• For married couples who file a joint return, if only one spouse is an active participant, the spouse who is an active participant falls into the $70,000-to-$80,000 range. This is increased from a range of $65,000 to $75,000. The spouse who is not an active participant falls into the $150,000 to the $160,000 range, which was the same for 2004.



Conclusion
Under 401(k) plans, employers are allowed to implement salary-deferral limits that are lower than the limits described above. Be sure to check with your human resources department to determine any applicable limitations. And where possible, seize any opportunity to increase the amounts you add to your retirement nest egg. As always, check with your tax professional to determine which savings option is best suited to your financial profile