The Internal Revenue Service (IRS) and Social Security Administration have released the cost-of-living adjustments (COLA) that apply to dollar limitations set forth in certain IRS code sections. Even though the economy may be recovering, most indexed figures remain the same for the second year in a row.
Social Security and Medicare Wage Base
For 2011, the Social Security wage base will remain at $106,800. This wage base has remained the same for three consecutive years—the first time since indexing started in 1975. The tax rate for employee withholdings remains at 7.65 percent. The Social Security rate of 6.2 percent is applied to wages up to the maximum taxable amount for the year; the Medicare portion of 1.45 percent is applied to all wages.
Indexed Compensation Levels
The indexed compensation levels for determining who is highly compensated or a key employee remain the same as 2010:
Compensation Level 2008 2009 2010 2011
Highly Compensated Employee $105,000 $110,000 $110,000 $110,000
Top Paid Group of 20 Percent $105,000 $110,000 $110,000 $110,000
Key Employee, Officer $150,000 $160,000 $160,000 $160,000
401(k) Plans
The maximum for elective deferrals will remain at $16,500 for 2011. And for those 50 or older, the catch-up contribution rate will also remain the same as 2010 at $5,500 for 2011. That means if you are aged 50 or over during the 2011 taxable year, you may generally defer up to $22,000 into your 401(k) plan.
Adoption Credit
For 2011, this refundable tax credit increases from $13,170 to $13,360. The credit starts to phase out at $185,210 of modified adjusted gross income (AGI) levels, and is completely phased out when modified AGI reaches $225,210.
The exclusion from income provided through an employer or a Section 125 cafeteria plan also has a $13,360 limit for the 2011 taxable year. And remember—a participant may take the exclusion from income and the tax credit if enough expenses were incurred to support both programs separately.
Health Savings Account (HSA)
Minimum deductible amounts for qualifying high-deductible health plans (HDHP) remain at $1,200 for self-only coverage and $2,400 for family coverage in 2011. Maximums for the HDHP out-of-pocket expenses remain at $5,950 for self-only coverage and $11,900 for family coverage.
Maximum contribution levels to an HSA are unchanged at $3,050 for self-only coverage and $6,150 for family coverage in 2011. The catch-up contribution allowed for those 55 and over is set at $1,000 for 2011.
Archer Medical Savings Account (MSA)
For a high-deductible insurance plan that provides single coverage, the deductible amount must be between $2,050 and $3,050 for 2011. Total out-of-pocket expenses under a plan that provides single coverage cannot exceed $4,100. The deductible amount must be between $4,100 and $6,150 for a plan that provides family coverage in 2011, with out-of-pocket expenses that do not exceed $7,500.
Although new MSAs may not be established, the maximum contribution to an MSA that is attributable to a single-coverage plan is 65 percent of the deductible amount. Maximum contributions for a family-coverage plan is 75 percent of the deductible amount. MSA and HSA contributions must be coordinated for the taxable year and cannot exceed the HSA maximums.
Dependent and/or Child
Daycare Expenses
Just a reminder. Although the daycare expense limit associated with a cafeteria plan is not indexed, the credit available through a participant’s tax filing was raised in 2003. The daycare credit must be filed on Form 2441 and attached to the 1040 tax filing form.
The cafeteria plan daycare contribution limit is $5,000 for a married couple filing a joint return, or for a single parent filing as “head of household.” For a married couple filing separate returns, the limit is $2,500 each.
The limits for the daycare credit expenses are $3,000 of expenses covering one child and $6,000 for families with two or more children. If one of the parents is going to school full time or is incapable of self-care, the non-working spouse would be “deemed” as earning $250 per month for one qualifying child and $500 for two or more qualifying children. This “deemed” earned income is used whether a person is using the employer’s cafeteria plan or taking the daycare credit.
The current child and dependent care tax credit limits are scheduled to sunset on December 31, 2010. Without Congressional action, the limits for the daycare credit will revert to $2,400 of expenses covering one child and $4,800 for families with two or more children on January 1, 2011.
The daycare credit is reduced dollar for dollar by contributions to or benefits received from an employer’s cafeteria plan. An employee may participate in their employer’s cafeteria plan and take a portion of the daycare expenses through the credit if they have sufficient expenses in excess of their cafeteria plan annual election, but within the tax credit limits.
Long Term Care
For a qualified long term care insurance policy, the maximum non-taxable payment is now $300 per day for 2011.
Finally, by participating in a cafeteria plan, the participant will be lowering his income for the Earned Income Tax Credit (EITC). Check out the new limits in IRS Publication 596 “Earned Income Credit” and for more information about this tax credit.
The information contained in this article is not intended to be legal, accounting, or other professional advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations.
