Late last year, the IRS confirmed the widely expected cost-of-living adjustments to the various dollar limitations applicable to qualified retirement plans for 2022. Here are a few of the changes outlined in Notice 2021-61.

Limit on Compensation

The maximum amount of compensation that may be counted for plan purposes for plan years beginning in 2022 is $305,000, a $15,000 increase compared to the 2021 cap. The adjustment is applicable for calendar year 2022 and for limitation years beginning in 2022.

Limits on Contributions and Benefits

The maximum limit on annual additions to a defined contribution plan increased from $58,000 to $61,000. Similarly, the maximum annual benefit that may be accrued under a defined benefit plan was raised from $230,000 to $245,000. These limitations are applicable for calendar year 2022 and for limitation years ending within 2022.

401(k) Deferral Limit

For 401(k) and 403(b) plans, the maximum voluntary salary deferral permitted in calendar year 2022 is $20,500, up $2,000 from 2021. The limit on catchup deferrals by those age 50 or older remains fixed at $6,500, though.

Identification of Highly Compensated and Key Employees

Effective for plan years beginning in 2022, a Highly Compensated Employee is any employee who (a) was a 5% owner during the current or preceding year or (b) received compensation from the employer during the preceding year in excess of $135,000. This is a $5,000 increase in the threshold that was applicable in 2020 and 2021. The dollar limit used to define a key employee in a top-heavy plan under IRC Section 416(i)(1)(A)(i), was upped by $15,000 to $200,000.

Taxable Wage Base

As was announced by the Social Security Administration on October 13, 2021, the Social Security taxable wage base for 2022 is $147,000, an increase of $4,200 over the 2021 wage base.

For plan years that operate on a fiscal year basis, this new wage base will be effective for plan years beginning in 2022.

The administration also implemented a whopping 5.9% cost-of-living increase in Social Security benefits, beginning on December 30, 2021. By comparison, the increase in 2021 was a mere 1.3%.

How to Maximize Contributions

We are frequently asked to provide the contribution formula needed to maximize contributions for an individual with compensation at or above the maximum limit. The following have been calculated based on the new wage base and these cost of-living adjustments:

• For a calendar year profit sharing plan integrated at the Social Security wage base, the contribution formula needed to achieve the maximum permissible allocation for an individual with compensation of $305,000 or more is: 17.04721% up to $147,000, plus 22.74721% in excess of $147,000 (up to $305,000)
• For a calendar year 401(k) plan integrated at the Social Security wage base and using the 3% safe harbor design, the profit-sharing contribution formula that, in the aggregate (with a $20,500 deferral and $9,150 safe harbor contribution), will achieve the maximum permissible allocation for an individual with compensation of $305,000 or more is: 7.3259% up to $147,000, plus 13.0259% in excess of $147,000 (up to $305,000)