On October 26, 2020, via Notice 2020-79, the IRS announced the effect of cost-of-living adjustments on certain 2021 dollar limits for various retirement plans (e.g., 401(k) plans and 403(b) plans). Certain limits will increase for 2021 because the increase in the cost-of-living index met statutory thresholds that trigger their adjustment. Here are the most notable figures for the majority of defined contribution plans:
- Compensation: The annual limit on compensation that can be taken into account for purposes of contributions and deductions will increase from $285,000 to $290,000. See Internal Revenue Code (“Code”) Section 401(a)(17), which relates to contributions, and Code Section 404(l), relating to deductions.
- Elective Deferrals: The elective deferral contribution limit will remain at $19,500 (not including catch-up contributions). See Code Section 402(g).
- Catch-Up Contributions: This limit for participants who will be at least 50 years of age at any point during 2021 will remain at $6,500. See Code Section 414(v).
- Highly Compensated Employees: The compensation threshold for determining who is a highly compensated employee will remain at $130,000. (Note that a participant’s ownership of the plan sponsor and/or a related organization, as well as certain interests owned by a participant’s family, may also affect this determination.) See Code Section 414(q).
- Annual Additions: The limit on the combination of participant contributions, employer contributions, and forfeiture allocations credited to a participant’s account will increase from $57,000 to $58,000. See Code Section 415(c).
- Key Employees: The compensation amount for determining which officers are key employees (which is important for top-heavy plan purposes) will remain at $185,000. See Code Section 416(i).
In addition, the Social Security Administration has announced that the Social Security taxable wage base will increase from $137,700 to $142,800 for 2021.
Individuals who administer retirement plans (e.g., Human Resources, Payroll, service providers) should start planning to implement the 2021 limits. This may involve steps such as drafting communications to employees, revising plan administration forms and manuals, and revising payroll systems.