The Internal Revenue Service (IRS) has announced 2021-dollar limitations on benefits, contributions, and compensation. The Internal Revenue Code (Code) affords tax benefits for employers that sponsor qualified plans and for employees who participate in such plans. In exchange for these tax benefits, the Code places limits on the contribution and benefit amounts. The IRS makes annual cost-of-living adjustments to these limits.
The rate of inflation was very low in 2020, so many of the limits remained the same. Nevertheless, there were a few changes.
The key limits for 2021 (and the limits that applied in 2020) are listed in the table below:
|§402(g)(1)(B)||401(k)/403(b) Elective Deferrals||$19,500||$19,500|
|§414(v)(2)(B)(i)||Age 50+ "Catch-Up" Contributions to 401(k), 403(b), and government 457(b) plans||$6,500||$6,500|
|§415(c)(1)(A)||DC Annual Additions||$58,000||$57,000|
|§415(b)(1)(A)||DB Annual Benefits||$230,000||$230,000|
|§414(q)(1)(B)(i)||Highly Compensated Employees||$130,000||$130,000|
|§401(a)(17)(A)||Annual Compensation Taken into Account||$290,000||$285,000|
|§223(b)(2)||HSA Annual Contribution Levels|
|§223(b)(3)||Age 55+ HSA "Catch-Up"||$1,000||$1,000|
|Social Security Wage Base||$142,800||$137,700|
The most important changes in these limits are as follows:
- The total annual limit on employer and employee contributions ("annual additions") will rise from $57,000 to $58,000. ("Catch-up contributions" do not apply in calculating this limit, so the annual limit for those age 50 and older can be as high as $64,500.) This will benefit employees in defined contribution plans that provide for after-tax employee contributions, or that include generous employer-provided benefits.
- The annual limit on compensation that can be used in calculating contributions and benefits and in performing certain nondiscrimination testing will increase from $285,000 to $290,000 (and will be even higher for certain government plans).
- The annual amount that individuals can contribute to health savings accounts, if they are covered by high-deductible health plans, will increase from $3,550 to $3,600 in the case of individual coverage, and from $7,100 to $7,200 in the case of family coverage.
- The Social Security Administration independently announced that the maximum amount of wages subject to Social Security taxes for 2021 will increase from $137,700 to $142,800.
Please contact any of the attorneys in our Employee Benefits and Executive Compensation Group if you have any questions regarding this alert.