2021 Cost Of Living Adjustments For Retirement Plans

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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:

LIMIT 2020 2021
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.

$19,500 $19,500
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.

$19,500 $19,500
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.

$6,500 $6,500
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).

$57,000 $58,000
Defined Benefit Plan Limit (IRC § 415(b))

The limitation on the annual benefits from a defined benefit plan.

$230,000 $230,000
Annual Compensation Limit (IRC § 401(a)(17))

The maximum amount of compensation that may be taken into account for benefit calculations and nondiscrimination testing.

$285,000

($425,000 for certain gov’t plans)

$290,000

($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.

$130,000

(for 2021 HCE determination)

$130,000

(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.

$185,000 $185,000
SEP Minimum Compensation Limit (IRC § 408(k)(2)(C))

The mandatory participation requirements for a simplified employee pension (SEP) includes this minimum compensation threshold.

$600 $650
SIMPLE Employee Contribution (IRC § 408(p)(2)(E))

The limitation on deferrals to a SIMPLE retirement account.

$13,500 $13,500
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.

$3,000 $3,000
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).

$137,700 $142,800

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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