Congress won’t permit lower cap on 401(k) contributions, top lawmaker says

Congress is not likely to permit the IRS to lower employee 401(k) contribution limits, even if inflation continues to decline, said a leading House Democrat.

“There is as close to zero chance as I could tell you that that’s going to happen, said Rep. Andrews, D-N.J., chairman of the House Education and Labor Committee’s Health, Employment, Labor and Pensions Subcommittee.

Mr. Andrews was responding to a report that the Internal Revenue Service may cut contribution limits to $16,000 from the current $16,500 because of deflation in July and August.

The IRS may reduce the amount that employees can contribute to their 401(k) plans in 2010 because the calculation to set the deferral limit is tied to the inflation rate.

Depending on the inflation level for September, the formula may require the IRS to lower the deferral limits, according to an analysis released last month by Mercer LLC’s Washington Resource Group. For those 55 and older, the additional “catch-up” contribution could be reduced to $5,000 from its current $5,500, the report suggested.

The IRS is expected to announce the 2010 contribution limit Oct. 15.

The Bureau of Labor Statistics reported today that the consumer price index decreased 1.5% in August over the previous 12 months. For July, the CPI decreased 2.1%. If the CPI for the full third quarter is negative, the IRS may have to reduce the 401(k) contribution limit level under the Internal Revenue Code.

“This is the first time we’ve been in this situation and there is no precedent,” said Bill McClain, a principal and consultant in Mercer’s retirement business, and one of the authors of the firm’s study.
The possible change in 401(k) contribution limits comes at a time when many investors are trying to rebuild their savings, he noted. “It seems to be sending the wrong message.”

IRS spokesman Bruce Friedland said in an e-mail that the IRS is “aware of the issue, and we are reviewing the relevant law. But with monthly inflation data still outstanding, it is too early to speculate.”