Retirement Benefit Changes Coming in 2012
Seniors will get significantly bigger Social Security checks in 2012 and face only modest increases in Medicare premiums. Workers will also be eligible to defer taxes on more money in their 401(k) plans and get more disclosures about the fees and expenses they are paying. Here’s a look at how retirement benefits will likely change in 2012.
Bigger Social Security checks. Social Security recipients will get a boost in payments next year for the first time since 2009. Social Security checks will increase 3.6 percent in 2012, with the typical retiree receiving about $43 more per month.
Higher Social Security taxes. The maximum amount of earnings subject to Social Security tax will increase to $110,100 in 2012, up from $106,800 in 2011, and result in about 10 million workers paying higher Social Security taxes. Also, the temporary reduction in workers’ Social Security taxes from 6.2 percent to 4.2 percent of earnings in 2011 is scheduled to end this year under current law.
A small increase in Medicare Part B premiums. The standard Medicare Part B premium will be $99.90 in 2012, up $3.50 from 2011 for people who signed up for Medicare in 2009 or earlier. Retirees who signed up for Medicare Part B in 2010 or 2011 and were charged the standard premium for new enrollees of $110.50 or $115.40, respectively, will see their premiums decline to $99.90 in 2012. High-income Medicare recipients whose modified adjusted gross income is greater than $85,000 for individuals or $170,000 for couples must pay higher Part B premiums, ranging from $40 to $219.80 per month more than the standard rate. But even most high earners will pay less in Medicare premiums than they did last year.
Slightly better Medicare Part D gap coverage. Medicare Part D plans have a coverage gap that begins once an enrollee spends $2,930 on prescription drugs and lasts until catastrophic drug coverage kicks in after the retiree has spent $6,658 on medication. Brand-name drugs purchased in that gap will be discounted by 50 percent and generic drugs by 14 percent in 2012, up slightly from 50 percent and 7 percent, respectively, in 2011. “Every plan is now offering a certain level of coverage in the coverage gap, which in previous years was a big concern for some people,” says Juliette Cubanski, a policy analyst at the Kaiser Family Foundation. “As part of the health reform law, the coverage gap is being phased out over time. That improves the value of the Part D benefit for every plan that is out there.”
Higher 401(k) limits. The contribution limit for 401(k)s, 403(b)s, and the federal government’s Thrift Savings Plan will increase to $17,000 in 2012, up from $16,500 in 2011. However, catch-up contribution limits for those age 50 and older will remain $5,500 next year.
401(k) fee disclosure. Retirement savers can expect to get additional information about the costs and fees that are deducted from their 401(k) account. The Labor Department issued a regulation in 2010 that requires most 401(k) plans to disclose the fees associated with participation in the 401(k) plan and costs of each investment option to plan participants by May 31, 2012. “Because employers have to produce this for participants, they are paying more attention to their fees. It’s causing them to look for lower-cost investments and recordkeeping solutions,” says Robyn Credico, senior retirement consultant at Towers Watson. “Participants will see a line item of fees on their statements. They were always paying it, but it will be more transparent for some participants.”
More 401(k) investment advice. A new Labor Department rule that goes into effect on Dec. 27, 2011, says retirement plan administrators will now be able to give advice to account holders if they meet specific requirements that ensure unbiased recommendations. “More employers are offering advice and offering more methods,” says Pamela Hess, director of retirement research at Aon Hewitt. Advice dispensed through a 401(k) or IRA must be given by an adviser whose compensation does not vary based on the investments selected, or given using a computer model that an independent expert certifies as unbiased.
More 401(k) match reinstatements. Most of the companies that suspended their 401(k) match during the recession have now restored them (75 percent), according to a Towers Watson survey of 260 companies that eliminated their match in January 2008 or later. The reinstatements primarily took place in January 2010 and January 2011. “We’re expecting to see a continuation of that trend in 2012,” says Credico.
Increased IRA income limits. IRA contribution limits will remain at $5,000 in 2012, and $6,000 for those age 50 and older. For singles and heads of household with retirement plans at work, the tax deduction for traditional IRA contributions will be phased out when their modified adjusted gross income is between $58,000 and $68,000 in 2012 ($92,000 to $112,000 for couples), up $2,000 from 2011. For those without a retirement plan at work, the income cutoffs will increase by $4,000 to between $173,000 and $183,000. The income limits for making Roth IRA contributions will grow by $3,000 ($4,000 for couples) to between $110,000 and $125,000 for singles and heads of household and $173,000 to $183,000 for couples in 2012.
Increased access to the Saver’s Credit. Workers with slightly higher incomes will be eligible for the Saver’s Credit next year, a tax credit worth up to $1,000 ($2,000 for couples). Those who have modified adjusted gross incomes of up to $28,750 for singles, $43,125 for heads of household, and $57,500 for married couples and contribute to a retirement account such as an IRA or 401(k) will be able to claim the credit, an increase of $500 to $1,000 in income from last year.
Higher pension insurance limits. The maximum traditional pension benefit insured by the Pension Benefit Guaranty Corporation will be $55,840.92 for a 65-year-old retiree in 2012, up from $54,000 in 2011 and the first increase since 2009. As in previous years, the maximum insured amount is higher if you delay collecting your pension beyond age 65, and lower if you claim your pension early or elect to receive survivor’s benefits.