On October 26, 2020, the Internal Revenue Service (IRS) released Notice 2020-79 announcing cost-of-living adjustments affecting dollar limits for pension plans and other retirement-related items for tax year 2021. Many pension plan limits will not change next year because the increase in the cost-of-living index has not met the statutory thresholds that trigger their adjustment. Other items, however, will increase for 2021. Here is a summary of the limits for 2021.
For 401(k), 403(b), and most 457 plans and the federal government’s Thrift Savings Plans:
- The elective deferral (contribution) limit will remain at $19,500 for 2021.
- The catch-up contribution limit for employees aged 50 and over who participate in these plans also will stay the same at $6,500 for 2021.
For individual retirement arrangements (IRAs):
- The limit on annual contributions will not change for 2021. 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 2021.
For simplified employee pension (SEP) IRAs and individual/solo 401(k) plans:
- Elective deferrals increase to $58,000 for 2021, based on an annual compensation limit of $290,000 (up from the 2020 amounts of $57,000 and $285,000).
- The minimum compensation that may be required for participation in a SEP is $650 for 2021 (up from $600 for 2020).
For savings incentive match plan for employees (SIMPLE) IRAs:
- The contribution limit on SIMPLE IRA retirement accounts will continue at $13,500 for 2021.
- The SIMPLE catch-up limit also remains unchanged at $3,000 for 2021.
For defined benefit plans:
- The basic limitation on the annual benefits under a defined benefit plan is $230,000 and will not change for 2021.
- The threshold for determining “highly compensated employees” is $130,000 and will not change for 2021.
- The threshold for officers who are “key employees” in a top-heavy plan remains at $185,000 for 2021.
- In a separate announcement, the Social Security Administration stated that the taxable wage base will increase to $142,800 for 2021, an increase of $5,100 from the 2020 taxable wage base of $137,700. Thus, the maximum Social Security tax liability will increase for both employees and employers.
The 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 2021 benefit limits for health flexible spending accounts (HFSAs) and transit benefit programs as explained here.