2015 Cost of Living Adjustment Released by IRS

The Cost of Living Adjustment (COLA) for 2015 has been released by the IRS.  Every year, COLA is determined according to a formula specified by the Social Security Act.  COLAs are based on increases in the Consumer Price Index for Urban Wage Earners and Clerical workers (CPI-W).  CPI-W’s are calculated on a monthly basis by the Bureau of Labor Statistics.  COLA’s are adjusted every year reflecting the CPI-W’s of the previous year.  In the case of the COLA for 2015, it reflects the period from October 1, 2013 through September 30, 2014, the third quarter of 2013 through the third quarter of 2014.

What does this mean for you?

401(k)

The amount of money you can save with your 401(k) has increased for next year.  The allowable amount of money you can contribute to your 401(k) has been increased $500 from 2014.  Reflecting the change in COLA, employees will be able to contribute up to $18,000 to their 401(k) in 2015.

Social Security

The change in COLA affects the amount coming out of your paycheck for the Federal Insurance Contributions Act (FICA).  FICA includes Social Security Tax and Medicare Tax, which comes out of your paycheck at a flat percentage rage.  The Social Security Tax is 6.2% of your wages, and the Medicare Tax is 1.45% of your wages.  The amount of taxable earnings is capped for the Social Security Tax, with 2014’s cap being $117,000.  In 2015, the maximum amount of taxable earnings is increased to $118,500.  Medicare, on the other hand, does not have a cap for the amount of taxable earnings.  In fact, those who earn over $200,000 will be taxed an additional 0.9% for Medicare. Here are the different ways COLA can effect you:

2015 COST OF LIVING INDEXED ADJUSTMENTS FOR QUALIFIED PLANS 2015 2014
Employee Salary Deferral Limit to 401(k) Plans $18,000 $17,500
Catch-up (age 50+) Deferral Limit to 401(k) Plans $6,000 $5,500
Defined Contribution Maximum Annual Additions $53,000 $52,000
Defined Benefit Maximum Annual Benefit $210,000 $210,000
Maximum Compensation- Qualified Retirement Plans $265,000 $260,000
Definition of Highly Compensated Employees $120,000 $115,000
FICA Taxable Wage Base $118,500 $117,000
SEP Minimum Compensation $600 $550
SIMPLE Retirement Accounts Deferral Limit $12,500 $12,000
Catch-up Deferral Limit for SIMPLE Accounts $3,000 $2,500

COLA fact sheet: http://www.ssa.gov/news/press/factsheets/colafacts2015.html If you have any questions or comments about how COLA affects you and your business, contact us at PAYDAY.

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