IRS Announces 2014 Pension Plan Amounts

Saving for retirement is critical because it allows you to accumulate wealth for the future and generally provides a tax break.

The Internal Revenue Code provides dollar limitations on benefits and contributions of qualified retirement plans. It also requires the IRS to adjust these limits for cost‑of‑living increases on an annual basis.

The IRS announced the pension plan limitation changes for 2014.

Some pension limitations remain unchanged "because the increase in the Consumer Price Index did not meet the statutory thresholds for their adjustments," the IRS explained. However, other limits will increase for 2014.

Below are some of the key amounts:

Annual Qualified Plan Limits	2014	2013
401(k), SARSEP, 403(b) Plan Deferrals (Section 402(g)) & 457 Plan deferrals (Section 457(b)(2))	$17,500	$17,500
401(k), 403(b), 457 & SARSEP additional "catch-up" contributions for employees age 50 and older	$5,500	$5,500
Defined contribution plan dollar limit on additions (Section 415(c)(1)(A))	$52,000	$51,000
Defined benefit plan limit on benefits (Section 415(b)(1)(A))	$210,000	$205,000
Maximum compensation used to determine contributions	$260,000	$255,000
SIMPLE deferrals (Section 408(p)(2)(A))	$12,000	$12,000
SIMPLE additional "catch-up" contributions for employees age 50 and older	$2,500	$2,500
Compensation defining highly compensated employee (Section 414(q)(1)(B))	$115,000	$115,000
Compensation defining key employee (officer)	$170,000	$165,000
The compensation amounts under Section 1.61‑21(f)(5)(i) of the Income Tax Regulations concerning the definition of "control employee" for fringe benefit valuation purposes	$105,000	$100,000
Compensation triggering Simplified Employee Pension (SEP) contribution requirement (Section 408(k)(2)(c))	$550	$550
IRAs	2014	2013
Traditional and Roth IRA Individual, up to 100% of earned Income	$5,500	$5,500
Roth and traditional IRA additional annual "catch-up" contributions for account owners age 50 and older	$1,000	$1,000

Is America Falling Behind in Workplace Skills?

Americans scored well below the international averages in three skill areas in tests given to adults in 24 countries. The Organization for Economic Cooperation and Development (OECD) released the results of its first survey in early October.
You might be surprised by the results on the Program for the International Assessment of Adult Competencies (PIAAC) exam:

More about the PIAAC Exam The goal of the Survey of Adult Skills (PIAAC) test is to provide insight into the availability of basic skills in society, as well as how they are used at work and home. In 2011 and 2012, OECD tested about 166,000 adults aged 16 to 65 in these countries and sub-national regions: Australia, Austria, Belgium, Canada, the Czech Republic, Cyprus, Denmark, Estonia, Finland, France, Germany, Ireland, Italy, Japan, Korea, the Netherlands, Norway, Poland, the Russian Federation, the Slovak Republic, Spain, Sweden, the United Kingdom, and the United States. Top performers include Finland and Japan. More than 20 percent of the Finn and Japanese testers read at high levels (Level 4 or 5 on the Survey of Adult Skills). By comparison, only 11.5 percent of U.S. test takers read at such high levels. Other top performers include the Netherlands, Sweden and Australia. Weak performers include Italy and Spain, where more than 30 percent of those tested scored the lowest levels for both literacy and numeracy (Level 1 or below on the Survey of Adult Skills).

• Americans ranked 16th out of 23 industrialized countries in literacy (written text).
• We scored 21st out of 23 in numeracy (numerical and mathematical concepts).
• In the "problem solving in technology-rich environments" test, the U.S. ranked 17th out of 19 countries.

Which countries scored the highest? Japan and Finland far surpassed the United States. (See right- hand box for more about various country results.)

Weak U.S. Test Scores
After reviewing the PIAAC scores, Joseph B. Fuller, a senior lecturer at Harvard Business School's Institute for Strategy and Competitiveness, paints a dismal picture of America's ability to compete in a global economy:

"The [PIAAC] results show that the U.S. has lost the edge it held over the rest of the industrial world over the course of Baby Boomers' work lives. We had a lead and we blew it. We have a substantial percentage of the workforce that does not have the basic aptitude to continue to learn and to make the most out of new technologies. That manifests itself in lower rates of productivity growth, and it's productivity growth that drives real wage growth."

Two trends in U.S. basic workplace skills are especially sobering:

1. Our numeracy scores are among the lowest in the world. Almost 30 percent of Americans tested received the lowest possible scores (Level 1 or below). Worldwide only 19 percent of those tested scored this low.


2. Americans entering the workforce are no more skilled than older workers.Normally, literacy, numeracy and problem solving skills peak around age 30 and decline over time, according to the OECD. The oldest age groups generally display lower levels of proficiency than the youngest. But that's not true in the United States. Improvements in workplace skills are barely apparent between younger and older generations.
   
   In numeracy, U.S. workers performed near the global average when comparing the overall proficiency of people aged 55 to 65 years. But young Americans don't hold a candle to their global peers. Americans aged 16 to 24 years scored the lowest in numeracy among all participating countries. We also have the smallest proportion of 16 to 24-year-olds who received top scores (Level 2 or higher) for problem solving in technology-rich environments.

Our relative inferiority is not necessarily because performance has declined in the United States, the OECD notes. Instead, it's because performance has risen much faster in many other countries across generations. This trend signals a marked decline in the competitiveness of U.S. workers of younger generations compared to their peers in other countries.

Skill Distribution Gap
Results among U.S. workers varied significantly across socioeconomic and education levels, as well as across different occupations. Americans with jobs that demand high levels of literacy, numeracy and technology problem-solving skills -- including managers, doctors and lawyers -- tended to outperform their peers in other countries.
But other Americans -- even those with college and graduate degrees -- tested behind their global peers.
As middle class jobs become increasingly complex, the average U.S. worker may not have the requisite skills to fill these roles. Those left behind may wind up unemployed and collecting various government benefits that burden the national economy.

Workplace Skills and Quality of Life
Worldwide, the OECD correlates test scores with an individual's ability to earn wages and secure employment. It reports that the median hourly wage of workers with high literacy scores is more than 60 percent higher than for workers who can only read relatively short texts. Those with low literacy skills are also more than twice as likely to be unemployed.
Even worse, the OECD found that underperformers on the test tend to:

• Report poor health;
• Believe that they have little impact on political processes;
• Not participate in associative or volunteer activities; and
• Distrust others.

How Employers Can Respond
From a business owner's perspective, this study could explain why it's hard for some U.S. employers to find and retain skilled workers. You may need to think outside your immediate geographic market to improve your supply of skilled workers. For example, a high-tech company located in a rural environment might consider employing remote employees (who work from home offices) to tap into a larger labor pool. Or when hiring, consider going global, say, to Canada, where the PIAAC results show skill-levels are higher.
Also, make better use of the existing labor pool in your area. Consider people who temporarily left the workforce, such as adults who earned a college degree later in life or former stay-at-home parents. And don't forget retirees who want to work part time.
Companies that can't find skilled workers might have to create their own through on-the-job training and flexible off-site continuing education. Employers that believe in their employees and provide lifelong learning opportunities engender loyalty, improve productivity and lower turnover.

Tax Benefits for Private School If you have doubts about the efficacy of the education system in your area, you're not alone. U.S. Secretary of Education Arne Duncan released the following statement about the PIAAC test results: These findings should concern us all. They show our education system hasn't done enough to help Americans compete -- or position our country to lead -- in a global economy that demands increasingly higher skills. People concerned about the quality of their children or grandchildren's education might opt for private education starting at the K-12 level. But "going private" can be costly. There's no federal tax "voucher" for private school costs. (Many states offer tax credits to offset private school costs.) There are some possible federal tax saving opportunities: Coverdell ESAs Coverdell Education Savings Accounts (ESAs) can be used to pay a student's eligible K-12 expenses, as well as post-secondary expenses. A non-deductible contribution of up to $2,000 per year can be made to a Coverdell ESA. Amounts deposited in the account grow tax-free until distributed. Distributions are tax-free as long as they're used for qualified education expenses, such as tuition and fees, required books, supplies, equipment and qualified expenses for room and board. Contributions to Coverdell ESAs are phased out if your modified adjusted gross income exceeds $95,000 ($190,000 for married joint filers). No exclusion is permitted if your MAGI is above $110,000 ($220,000 for married joint filers). Another Option Grandparents and generous extended family members can pay an unlimited amount of education expenses without incurring gift taxes or tapping into their unified federal gift and estate tax exemption. The catch is that the donor must pay expenses directly to the school, rather than reimburse the parent for paying the expenses. Child and Dependent Care Credit Just as with public schools, the portion of private school fees you pay for before and after hours school programs may qualify for the child and dependent care credit. This credit can be worth up to 35 percent of your qualifying costs for care, depending upon your income. You can claim up to $3,000 of the total costs if you have one qualifying child. If you have two or more, you can claim up to $6,000 of the costs.

Paying for Performance and 2014 Raises: What Others are Planning

Job performance matters. But at your organization, does it matter enough when the time comes to hand out raises? The latest General Industry Salary Budget Survey of 910 employers from Towers Watson Data Services indicates employees whose performance ratings are below average can look forward to raises next year in the 1.3 percent range, which is slightly below the projected national inflation rate (based on the Consumer Price Index).  

This 1.3 percent figure for below average performance is the same across categories, from non-exempt employees to managers and executives. This suggests one of two things.

1. Respondents to the survey have confidence their under-performing employees and managers have the potential to improve their performance and will improve in the future, or


2. Respondents simply don't have the stomach to "punish" under-performers by giving them no raise at all.

Yet taking this more hard-nosed no raise approach, particularly in a low-inflation, relatively high unemployment environment, would convey a stronger message that under-performance is not taken lightly, without being unduly harsh.

How Average is Average? 

In addition, as the table below indicates, employers are rating fairly high numbers of employees either as top performers or above-average performers (combining those two categories). The proportion of employees receiving "below average" ratings is much smaller. This pattern is reminiscent of Lake Wobegone of Prairie Home Companion radio show fame, where everybody is above average. 

Employee Performance Rating Distributions by Job Category
Performance rating	Management and Executives	Exempt Non-Management	Non-Exempt Salaried*	Non-Exempt Hourly
Highest possible	14%	11%	10%	10%
Above average	31%	28%	26%	24%
Average	51%	56%	57%	60%
Below average	4%	5%	6%	6%

* Total equals 99% due to rounding error.
Source: 2013 Towers Watson General Industry Salary Budget Survey

Also noteworthy in the table above is the relative similarity of the performance distributions by job function. The one exception is the management/executive category, which has a significantly higher distribution of combined above-average and highest possible performance ratings.

Modest Raises for Top Performers

Projected 2014 raises for employees by job performance rating, as shown in the table below, also reveals a general consistency in the planned percentage-of-salary level of raises for each of the four basic job categories. The numbers are remarkably similar to raises granted this year and in 2012.

Projected 2014 Employee Raises by Job Category
Performance rating	Management and Executives	Exempt Non-Management	Non-Exempt Salaried	Non-Exempt Hourly
Highest possible	4.50%	4.60%	4.50%	4.30%
Above average	3.50%	3.60%	3.50%	3.40%
Average	2.60%	2.60%	2.60%	2.50%
Below average	1.30%	1.30%	1.30%	1.40%

Source: 2013 Towers Watson General Industry Salary Budget Survey

According to the table above, projected raises for top performers are not even double those of average employees, at these companies. This approach may be a mistake. At the Fortune "Most Admired" companies, top performers received raises triple those of average performers. Where the "raise gap" is narrower, incentives to work harder and smarter are narrowed as well. Also top performers -- assuming they are rated honestly -- are the ones you can least afford to lose. Not only does their performance matter in and of itself, but top performers set the bar higher for everyone else, by their example. 

Raises not Only Factor in Retention

Giving out large raises to those who perform well is not the only thing you need to do to retain them, of course. You can have high turnover rates regardless of the competitiveness of your salary and raise levels if you have deficient supervisors. In fact employees often quit because of workplace environment issues rather than pay -- although a low pay raise may be the last straw for top performers who are unhappy with their jobs for other reasons.

Additional highlights from the Towers Watson Survey:

• Budgeted 2014 pay raises are remarkably similar by job level; the average is 3 percent, with the highest average (3.1 percent) for executives and the lowest (2.9 percent) for non-exempt hourly workers.


• The average company is projecting the additional cost to their salary budgets in 2014 due to employee promotions will be 1.4 percent of their entire salary budget.


• Projected discretionary bonuses to be awarded next year will average 18 percent of salary for executives, 9 percent for non-executive managers, 6 percent for exempt non-managers, 5 percent for non-exempt salaried employees and the same level for non-exempt hourly workers.

If you are scratching your head trying to fairly divvy up a small budget for raises, it might be time to consider not just what you feel you have to do to keep employees happy, but consider what you are trying to accomplish, what performance you are hoping to reward and encourage, and proceed from there.

What Does the Federal Government Shutdown Mean for Taxes?

Due to the current federal government shutdown, IRS operations are limited. However, the tax agency issued a release stating "the underlying tax law remains in effect, and all taxpayers should continue to meet their tax obligations as normal."

Here are some basic questions for taxpayers about what they should do during the shutdown, along with answers from the IRS.

How Does the Shutdown Affect Me?

• You should continue to file and pay taxes as normal.
• All other tax deadlines remain in effect, including those covering individuals, corporations, partnerships and employers. The regular payroll tax deadlines remain in effect as well.
• You can file your tax return electronically or on paper --- although the processing of paper returns will be delayed until full government operations resume. Payments accompanying paper tax returns will still be accepted as the IRS receives them.
• Tax refunds will not be issued until normal government operations resume.
• Tax software companies, tax practitioners and Free File will remain available to assist with taxes.

What IRS Services Will Be Available?

• For taxpayers seeking assistance, only the automated applications on the regular 800-829-1040 telephone line will remain open.
• The IRS website (IRS.gov) will remain available, although some interactive features may not be working.
• The IRS Free File partners will continue to accept and file tax returns.
• Tax software companies will continue to accept and file tax returns.

Is the October 15 Due Date Still in Effect and Should People Still File by Then?
Taxpayers should continue to file and pay taxes during a lapse in appropriations as they would under normal government operations. Individuals who requested an extension of time to file should file their returns by October 15, 2013. Taxpayers can file their tax returns electronically or on paper. However, the processing of paper returns will be delayed until full government operations resume.
Payments accompanying paper tax returns will still be accepted as the IRS receives them. Tax refunds will not be issued until normal government operations resume. Tax software companies, tax practitioners and Free File will remain available to assist with taxes.
All other tax deadlines remain in effect, including those covering individuals, corporations, partnerships and employers. The regular payroll tax deadlines remain in effect as well. Penalties and interest still apply for all late filings not received by the regular deadlines.

Will Electronically Filed Returns Be Processed? 
Individuals and businesses should keep filing their tax returns and making deposits with the IRS, as they are required to do so by law. Taxpayers are urged to file electronically, because most of these returns will be processed automatically. Payments accompanying electronic tax returns will be accepted as the IRS receives them, although the IRS will be unable to issue refunds during this time.

Will Paper Tax Returns Be Processed?
Individuals and businesses should keep filing their tax returns and making deposits with the IRS as they are required to do so by law. However, the processing of paper returns will be delayed until full government operations resume. Payments accompanying paper tax returns will still be accepted as the IRS receives them, though the IRS will be unable to issue refunds during this time.

Will Paper Tax Returns Be Considered to Be Filed on Time Even though the IRS is Not Processing Paper Returns?
Yes. the U.S. Postal Service is operating during the shutdown, and it will postmark and deliver mail to the IRS. Any return postmarked by the due date will be considered timely filed by the IRS even though processing of the return may not occur until after the return due date depending on the length of the lapse in appropriations.

Can I Obtain a Tax Transcript during the Shutdown?
Yes. This is an automated process. Taxpayers can still use automated tools, including IRS.gov, to request that a transcript of their personal tax records be sent to their address of record; the taxpayer will typically receive transcripts in the mail within five to 10 calendar days.

Can a Third Party Obtain a Tax Transcript during the Shutdown?

No. Transcript requests from third parties require actions by IRS employees, who are not available due to the current lapse in government appropriations. During this period, transcript requests by third parties, such as financial institutions, cannot be processed through the IRS Return and Income Verification Services and Income Verification Express Service. These processes are not automated. However, individuals requesting their own transcripts can still use the automated process.

For more information, contact your tax adviser or visit the IRS.gov website.