Seyfarth Synopsis: Many of the limitations that apply to tax-qualified plans, including 401(k) and 403(b) plans, are subject to cost-of-living increases. The IRS just announced the 2021 limits. The annual employee salary deferral contribution limits are not changing, but there are a few adjustments for 2021 that employers maintaining tax-qualified retirement plans will need to make to the plans’ administrative/operational procedures.
In Notice 2020-79, the IRS recently announced the various limits that apply to tax-qualified retirement plans in 2021. Notably, the “regular” 401(k) contribution limit and the “catch-up” contribution limit are not changing, and will remain at $19,500 and $6,500, respectively, for 2021. Thus, if you are or will be age 50 by the end of 2021, you may be eligible to contribute up to $26,000 to your 401(k) plan in 2021. These same limitations apply if you work for a governmental or tax-exempt employer and participate in a 403(b) plan.
The annual plan limits that did increase for 2021 include:
- the maximum that may be contributed to a defined contribution plan (e.g., 401(k) or 403(b) plan) in 2021, inclusive of both employee and employer contributions, will increase by $1,000 to $58,000; and
- the maximum annual compensation that may be taken into account under a plan (the 401(a)(17) limit) will increase from $285,000 to $290,000.
The Notice includes numerous other retirement-related limitations for 2021, including a $6,000 limit on qualified IRA contributions (unchanged) and adjustments to the income phase-out for making qualified IRA contributions. Other dollar limits for 2021 that are not changing include the dollar limitation on the annual benefit under a defined benefit plan ($230,000), the dollar limit used to determine a highly compensated employee ($130,000), and the dollar limit used when defining a key employee in a top-heavy plan ($185,000).
Individuals should check their plan contribution elections and consult with their personal tax advisor before the end of 2020 to make sure that they take full advantage of the contribution limits in 2021. Although many limits are not changing, employers who sponsor a tax-qualified retirement plan should still consider any necessary adjustments to plan administrative procedures and participant notices to ensure proper administration of the plan in 2021.
Employers who sponsor defined benefit pension plans (e.g., cash balance plans) also should be sure to review the new limits in the IRS Notice and make any necessary adjustments to plan administrative/operational procedures.