The Internal Revenue Service recently announced its cost-of-living adjustments applicable to dollar limitations on benefits and contributions for retirement plans generally effective for Tax Year 2021 (see IRS Notice 2020-79). Most notably, many of the retirement plan limitations, including the limitation on annual salary deferrals into a 401(k) or 403(b) plan, remain unchanged. The more significant dollar limits for 2021 are as follows:
|401(k)/403(b) Elective Deferral Limit (IRC § 402(g))
The annual limit on an employee’s elective deferrals to a 401(k) or 403(b) plan made through salary reduction.
|Government/Tax Exempt Deferral Limit (IRC § 457(e)(15))
The annual limit on an employee’s elective deferrals concerning Section 457 deferred compensation plans of state and local governments and tax-exempt organizations.
|401(k)/403(b)/457 Catch-up Limit (IRC § 414(v)(2)(B)(i))
In addition to the regular limit on elective deferrals described above, employees over the age of 50 generally can make an additional “catch-up” contribution not to exceed this limit.
|Defined Contribution Plan Limit (IRC § 415(c))
The limitation for annual contributions to a defined contribution plan (such as a 401(k) plan or profit sharing plan).
|Defined Benefit Plan Limit (IRC § 415(b))
The limitation on the annual benefits from a defined benefit plan.
|Annual Compensation Limit (IRC § 401(a)(17))
The maximum amount of compensation that may be taken into account for benefit calculations and nondiscrimination testing.
($425,000 for certain gov’t plans)
($430,000 for certain gov’t plans)
|Highly Compensated Employee Threshold (IRC § 414(q))
The definition of an HCE includes a compensation threshold for the prior year. A retirement plan’s discrimination testing is based on coverage and benefits for HCEs.
(for 2021 HCE determination)
(for 2022 HCE determination)
|Key Employee Compensation Threshold (IRC § 416)
The definition of a key employee includes a compensation threshold. Key employees must be determined for purposes of applying the top-heavy rules. Generally, a plan is top-heavy if the plan benefits of key employees exceed 60% of the aggregate plan benefits of all employees.
|SEP Minimum Compensation Limit (IRC § 408(k)(2)(C))
The mandatory participation requirements for a simplified employee pension (SEP) includes this minimum compensation threshold.
|SIMPLE Employee Contribution (IRC § 408(p)(2)(E))
The limitation on deferrals to a SIMPLE retirement account.
|SIMPLE Catch-up Limit (IRC § 414(v)(2)(B)(ii)))
The maximum amount of catch-up contributions that individuals age 50 or over may make to a SIMPLE retirement account or SIMPLE 401(k) plan.
|Social Security Taxable Wage Base
See the 2021 SS Changes Fact Sheet.
This threshold is the maximum amount of earned income on which Social Security taxes may be imposed (6.20% paid by the employee and 6.20% paid by the employer).