On October 26, 2020, the Internal Revenue Service announced the cost-of-living adjustments (COLA) that will take effect on January 1, 2021 (IRS Notice 2020-79). These COLAs affect various contribution and deduction limits for qualified retirement plans, as well as the deductible contribution limits for traditional Individual Retirement Arrangements (IRAs).
Internal Revenue Code Section 415(d) requires that the Secretary of the Treasury annually adjust these limits for cost-of-living increases. These adjustment procedures are similar to those used to adjust benefit amounts under IRC Section 215(i)(2)(A) or the Social Security Act.
While some limitations increased, the majority of the limitations remain unchanged from the 2020 limits. The more common limitations are summarized below, along with the applicable Code Section and/or Treasury Regulations Section (Regs).
The annual contribution limitation for defined contribution plans increases from $57,000 to $58,000 (Code Section (415(c)(1)(A)).
The annual maximum considered compensation limit increases from $285,000 to $290,000 (Code Sections 401(a)(17), 404(l),408(k)(3)(C) and 408(k)(6)(D)(ii)).
The dollar limitation for determining the maximum account balance in an Employee Stock Ownership Plan (ESOP), subject to a five-year distribution period, increases from $1,150,000 to $1,165,000; however the dollar amount used to determine the lengthening of the five-year distribution period remains unchanged at $230,000 (Code Section 409(o)(1)(C)(ii)).
The Social Security Taxable Wage Base increases from $137,700 to $142,800.
The compensation threshold for simplified employee pensions (SEPs) increases from $600 to $650. (Code Section 408(k)(2)(C)).
The annual deferral limit for 401(k), 403(b), and 457 plans remains unchanged at $19,500 (Code Sections 402(g)(1),402(g)(3)).
The annual deferral limit for deferred compensation plans of state and local governments, and tax-exempt organizations remains unchanged at $19,500 (Code Section 457(e)(15)).
The limitation on the annual benefit under a defined benefit plan remains unchanged at $230,000. (Code Section 415(b)(1)(A)).
The annual “look-back” compensation income limit for purposes of the definition of “Highly Compensated Employee” remains unchanged at $130,000 (Code Section 414(q)(1)(B)).
The annual compensation threshold for purposes of the definition of “Key Employee” in a top-heavy plan remains unchanged at $185,000 (Code Section 416(i)(1)(A)(i)).
The annual deferral limitation for SIMPLE retirement accounts remains unchanged at $13,500 (Code Section 408(p)(2)(E)).
The maximum amount of catch-up contributions that individuals age 50 or over may make to 401(k) plans, 403(b) plans, SEPs and governmental 457(b) plans remains unchanged at $6,500 (Code Section 414(v)(2)(B)(i)).
The dollar limitation on premiums paid with respect to a Qualifying Longevity Annuity Contract (QLAC) remains unchanged at $135,000. (Code Section 1.401(a)(9)-6 and Regs Section A-17(b)(2)(ii)).
The maximum amount that can be contributed to an IRA remains unchanged at $6,000 (Code Section 219(b)(5)(A)).
The IRA catch-up contribution limit for IRAs remains unchanged at $1,000 (Code Section 219(b)(5)(A)).
The limitation concerning the qualified gratuitous transfer of qualified employer securities to an ESOP remains unchanged at $50,000 (Code Section 664(g)(7)).
The maximum amount of catch-up contributions that individuals age 50 or over may make to SIMPLE 401(k) plans or SIMPLE retirement accounts remains unchanged at $3,000 (Code Section 414(v)(2)(B)(ii)).
Quick reference guide to key limitations for 2020 and 2021:
You’ve heard our thoughts… We’d like to hear yours
The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at [email protected].
Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.