According to human resources consulting firm Mercer, the IRS might be forced to reduce 401(k) contribution limits in 2010. Next year’s limits, which are tied to inflation, will be announced in October.
Inflation has been negative since March so, unless it picks up between now and October, the IRS will have no choice but to reduce contribution limits. If this happens, the contribution limits would fall from $16, 500 to $16, 000 with catchup contributions falling from $5, 500 to $5, 000.
Robert Powell from MarketWatch has an interesting take on this. His view is that Uncle Sam would be sending the wrong message to investors by reducing the limits. At the same time, he argues that the change will have very little “real” impact because so few workers actually hit the limit in any given year.