The IRS announced cost of living adjustments affecting dollar limitations for employer plans for tax year 2021. Most IRS limits impacting employer retirement plans have remained the same because the increase in the cost-of-living index did not meet the legal thresholds that trigger their adjustment. See IRS Notice 2020-79 and IRS Revenue Procedure 2020-32 for additional IRS technical guidance.
Retirement Plan Limitation Highlights for 2021
The following chart lists the key dollar amounts for qualified retirement plans:
|IRC §402(g) limit on elective deferrals in 401(k) and 403(b) plans||$19,500||$19,500||No Change|
|Catch-up contribution limit for employees age 50 or over in 401(k) and 403(b) plans||$6,500||$6,500||No Change|
|Annual limit on compensation under §401(a)(17)||$285,000||$290,000||Increase $5,000|
|Highly compensated employee compensation threshold||$130,000||$130,000||No Change|
|Maximum contribution limit to a defined contribution plan||$57,000||$58,000||Increase $1,000|
|Maximum limit on “annual benefit payments” under a defined benefit plan||$230,000||$230,000||No Change|
|Maximum dollar limitation for key employee definition in top heavy plans||$185,000||$185,000||Unchanged|
|Social Security Wage Cap||$137,700||$142,800||Increase $5,100|
Welfare and Fringe Benefit Limitation Highlights for 2021
|HSA contribution limit (employer + employee)||Self-only: $3,550
|Self-only Increase: $50
Family Increase: $100
|HSA catch-up contributions (age 55 or older)||$1,000||$1,000||No Change|
|HDHP minimum deductibles||Self-only: $1,400
|HDHP maximum out-of-pocket amounts (deductibles, co-payments and other amounts, but not premiums)||Self-only: $6,900
|Self-only Increase: $100
Family Increase: $200
|Health FSA Contribution Limit||$2,750||$2,750||No Change|
What These Changes Mean for Employers
Employers that are plan sponsors should ensure that their payroll and administrative systems and formulas are updated to include the limits that have been adjusted. These limits are effective January 1, 2021. Employee communications and enrollment materials should also be updated.
Additionally, employers should consider that these limitation changes may affect nondiscrimination testing results and will increase the maximum permissible profit sharing allocations under a defined contribution plan and the maximum benefits available under a defined benefit plan. Employers should also review how the 2021 IRS limits impact their nonqualified deferred compensation plans regarding employee deferrals and employer contributions.
About the Author: Roberta Granadier is an attorney in Dickinson Wright’s Troy office, where she practices in the area of employee benefits law. She has extensive experience with benefits issues in corporate transactions, executive compensation, ESOPs and public retirement plans. Roberta can be reached at 248-433-7552 or RGranadier@dickinsonwright.com and you can visit her bio here.