Today, the Internal Revenue Service (IRS) released Notice 2019-59 announcing cost-of-living adjustments affecting dollar limits for pension plans and other retirement-related items for tax year 2020. Many pension plan limits will change next year because the increase in the cost-of-living index has met the statutory thresholds that trigger their adjustment. Other items, however, will remain the same. The following is a summary of the limits for 2020.
For 401(k), 403(b), and most 457 plans and the federal government’s Thrift Savings Plans:
- The elective deferral (contribution) limit increases from $19,000 for 2019 to$19,500 for 2020.
- The catch-up contribution limit for employees aged 50 and over who participate in these plans will increase from $6,000 for 2019 to $6,500 for 2020.
For individual retirement arrangements (IRAs):
- The limit on annual contributions will not change for 2020. It remains $6,000.
- The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment so it remains $1,000 for 2020.
For simplified employee pension (SEP) IRAs and individual/solo 401(k) plans:
- Elective deferrals increase to $57,000 for 2020, based on an annual compensation limit of $285,000 (up from the 2019 amounts of $56,000 and $280,000).
- The minimum compensation that may be required for participation in a SEP remains unchanged at $600 for 2020.
For savings incentive match plan for employees (SIMPLE) IRAs:
- The contribution limit on SIMPLE IRA retirement accounts increases to $13,500 for 2020 (from $13,000 for 2019).
- The SIMPLE catch-up limit remains unchanged at $3,000 for 2020.
For defined benefit plans:
- The basic limitation on the annual benefits under a defined benefit plan is increased to $230,000 for 2020 (from $225,000 for 2019).
- Highly-compensated and key employee thresholds:
- The threshold for determining “highly compensated employees” increases to $130,000 for 2020 (from $125,000 for 2019).
- The threshold for officers who are “key employees” in a top-heavy plan increases to $185,000 for 2020 (from $180,000 for 2019).
- Social Security cost of living adjustment: In a separate announcement, the Social Security Administration stated that the taxable wage base will increase to $137,700 for 2020, an increase of $4,800 from the 2019 taxable wage base of $132,900. Thus, the maximum Social Security tax liability will increase for both employees and employers.
Get It All
Today’s IRS announcement is needed information for employers that sponsor 401(k) plans and other types of retirement and savings plans. For those interested in health and welfare plans, the IRS released a separate announcement on the 2020 benefit limits for health flexible spending accounts (HFSAs) and transit benefit programs as explained here.