The IRS recently announced the 2019 cost-of-living adjustments for a host of retirement plan limits. You should be getting notified by your record keeper or third party administrator about these changes and how they might affect your plan. While there are a number of retirement plan limits that are affected, the limit on the amount of 401(k) employee elective deferrals garners the most attention. Effective January 1, 2019, this annual limit has been increased from $18,500 to $19,000, or approximately 2.7%. The amount of “catch up” contributions that employees age 50 and older can make remains unchanged at $6,000.
Although any increase in the amount employees can save for retirement is a good thing, not that many are in a position to contribute the maximum. For example, according to Vanguard data, only 13% of employees maxed out their contributions in 2017. This would suggest that only a small percentage of plan participants will take advantage of the 2019 cap increase.
Viewing the increase from a percentage perspective, however, may provide an opportunity to encourage participants to increase their contributions, even if they are currently not saving the maximum amount allowed. This can be accomplished by suggesting a percentage increase in contributions equal to the percentage increase in the maximum amount (2.7% in 2019, as noted earlier). For instance, if a participant is currently contributing $5,000 annually to the plan, then he or she could increase it by $135 (i.e. $5,000 x 2.7%). Participant educational sessions or other communication initiatives can help drive this. Your plan adviser or record keeper should be consulted to help determine an appropriate approach.