COLAs in the Time of COVID-19

Ogletree, Deakins, Nash, Smoak & Stewart, P.C.

On October 26, 2020, the Internal Revenue Service (IRS) updated various dollar limitations that apply to tax-qualified retirement plans for 2021. The new amounts, published in Notice 2020-79, are annually adjusted for cost of living. Despite the potential impact of COVID-19 on employee pay, most of the annual compensation limitations have been adjusted upwards. The annual additions limitation for defined contribution plans (which includes both employee elective deferrals and employer contributions) has been increased, too, although the elective deferral and catch-up contribution maximums have not changed. Key 2021 amounts that affect tax-qualified retirement plans are listed below, compared to the current amounts. Changes from the current amounts are bolded.

Internal Revenue Code (IRC) or Regulation Section 2021 2020
Defined benefit plan limit:
IRC § 415(b)(1)(A)
$230,000 $230,000
Defined contribution plan limit: IRC § 415(c)(1)(A) $58,000 $57,000
Elective deferral exclusion limitation: IRC § 402(g)(1) $19,500 $19,500
Annual compensation limit:
IRC § 401(a)(17)/404(l)
$290,000 $285,000
Annual Simplified Employee Pension (SEP) compensation limit:
IRC § 408(k)(3)(C)
$290,000 $285,000
Key employee dollar limitation: IRC § 416(i)(1)(A)(i) $185,000 $185,000
Employee Stock Ownership Plan (ESOP) maximum account balance:
IRC § 409(o)(1)(C)
Highly compensated employee limitation: IRC § 414(q)(1)(B) $130,000 $130,000
Catch-up contributions limitation:
IRC § 414(v)(2)(B)(i)
$6,500 $6,500
Savings Incentive Match Plan for Employees (SIMPLE) catch-up contributions limitation:
IRC § 414(v)(2)(B)(ii)
$3,000 $3,000
SEP minimum compensation amount: IRC § 408(k)(2)(C) $650 $600
SIMPLE contribution limit: IRC § 408(p)(2)(E) $13,500 $13,500
Deferral limitation: IRC § 457(e)(15) $19,500 $19,500
Social Security tax wage base $142,800 $137,700

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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