Tax laws place limitations on the amount of contributions and benefits that may be allocated to a retirement plan or IRA each year. The limits differ depending on the type of plan.
The Internal Revenue Code requires the Secretary of Treasury to annually adjust the dollar limitations on benefits and contributions under qualified retirement plans to accommodate cost-of-living increases. On October 26, 2020, the Internal Revenue Service (IRS) issued Notice 2020-79 which announced the limits for 2021. The table below reflects a list of current limits and those that will be effective as of January 1, 2021. For a comprehensive list of updates, click here.
|Retirement Plan||2020 Limit||2021 Limit|
|401(k), 403(b) and 457(b) Elective Deferrals||$19,500||$19,500 (unchanged)|
|Catch-up Contributions (age 50 or older)||$6,500||$6,500 (unchanged)|
|Maximum Annual Benefit||$230,000||$230,000 (unchanged)|
|Defined Contribution Plans- Limit on Annual Allocations||$57,000||$58,000|
|Annual Compensation Limits||$285,000||$290,000|
|Key Employee Compensation Limit||$185,000||$185,000 (unchanged)|
|Maximum Account Balance in an Employee Stock Ownership Plan (ESOP) subject to a 5-year distribution period||$1,150,000||$1,165,000|
|ESOP dollar amount used for determining the lengthening of the 5-year distribution period||$230,000||$230,000 (unchanged)|
|Limitation used in the definition of “highly compensated employee”||$130,000||$130,000 (unchanged)|
|SIMPLE Catch-up Contributions||$3,000||$3,000 (unchanged)|
|SIMPLE Maximum Contributions||$13,500||$13,500 (unchanged)|
Employers should be aware of the limits discussed above, and if a change is relevant, employers should take steps to update any in-house plan materials that are distributed to employees and any other internal data systems such as payroll or other recordkeeping systems. If you have questions about how an update may require change in your organization, contact an attorney in Critchfield’s employment practice group.