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IRS Announces 2021 Retirement Plan and Other Dollar Limits and Thresholds

EBIA  

EBIA  

IRS Notice 2020-79 (Oct. 26, 2020); IRS News Release IR-2020-244 (Oct. 26, 2020); SSA Notice: Cost-of-Living Increase and Other Determinations for 2021 (Oct. 22, 2020)

IRS Notice

IRS News Release

SSA Notice

The IRS has announced the 2021 dollar limits and thresholds for retirement plans, reflecting the latest cost-of-living adjustments. (Dollar limits and thresholds primarily affecting health and welfare plans were announced in separate guidance; see our Checkpoint article.) Here are those most relevant to 401(k) plans:

  • Annual Additions. The limit on annual additions (i.e., contributions) to 401(k) and other defined contribution plans will increase to $58,000 (up from $57,000). Code § 415(c)(1)(A).
  • Compensation. The annual limit on compensation that can be taken into account for contributions and deductions will increase to $290,000 (up from $285,000). Code §§ 401(a)(17) (for 401(k) and other qualified plans), 404(l) (for deductions), 408(k)(3)(C) (for simplified employee pension plans (SEPs)), and 408(k)(6)(D)(ii) (for salary reduction simplified employee pension plans (SARSEPs)).
  • Elective Deferrals. The annual limit on elective deferrals remains at $19,500 for 401(k), 403(b), and 457 plans, as well as SARSEPs, and at $13,500 for SIMPLE plans and SIMPLE IRAs. Code §§ 402(g)(1), 457(e)(15), and 408(p)(2)(E).
  • Catch-Up Contributions. The annual limit on catch-up contributions for individuals age 50 and over remains at $6,500 for 401(k) plans, 403(b) contracts, 457 plans, and SARSEPs, and at $3,000 for SIMPLE plans and SIMPLE IRAs. Code § 414(v)(2)(B).
  • HCE. The threshold for determining who is a “highly compensated employee” (HCE) remains at $130,000. Code § 414(q)(1)(B).
  • Key Employee. The threshold for determining whether an officer is a “key employee” under the top-heavy rules (as well as the cafeteria plan nondiscrimination rules) remains at $185,000. Code § 416(i)(1)(A)(i).
  • SEP Participation. The threshold for determining participation in a SEP or SARSEP will increase to $650 (up from $600). Code § 408(k)(2)(C).
  • Saver’s Tax Credit. The upper income limit for determining whether certain individuals are eligible for the saver’s tax credit (also known as the retirement savings contributions credit) will increase to $66,000 (up from $65,000) for married filing jointly; to $49,500 (up from $48,750) for head of household; and to $33,000 (up from $32,500) for all other taxpayers. For individuals whose adjusted gross income is below those thresholds, there are also some adjustments to the income levels that trigger a change in the percentage used to calculate the credit. Code § 25B.

The IRS has also announced that the amounts for determining who is a “control employee,” a classification relevant to the valuation of company car benefits, will remain unchanged for officers at $115,000, and will increase to $235,000 (up from $230,000) for other employees. Separately, the Social Security Administration (SSA) has announced that the Social Security taxable wage base for 2021 (i.e., the taxable maximum) will increase to $142,800 (up from $137,700).

EBIA Comment: Plan sponsors, administrators, and advisors will want to carefully note when the new limits and thresholds apply. Employee communications, plan procedures, and administrative forms should be reviewed and updated as necessary to reflect these changes. For more information, see EBIA’s 401(k) Plans manual at Sections II.H.2 (“Retirement Savings Contributions Credit for Certain Income-Eligible Plan Participants”), X (“Contributions: The Code’s Annual Limitations”), and XVIII.K.2 (“HCE Compensation Threshold”). See also EBIA’s Cafeteria Plans manual at Section XXVIII.M (“Highly Compensated and Key Employees—Identifying the ‘Prohibited Group’ Members”). The HCE and key employee definitions also apply to a variety of fringe benefits, as explained in EBIA’s Fringe Benefits manual; for example, see Sections IX.F (“Qualified Employee Discount Programs: No Exclusion for Highly Compensated Employees If Discount Program Is Discriminatory”) and XIV.E (“Group-Term Life Insurance: Nondiscrimination: Overview”).

Contributing Editors: EBIA Staff.

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