The IRS announced cost of living adjustments affecting dollar limitations for employer plans for tax year 2021. Most IRS limits impacting employer retirement plans have remained the same because the increase in the cost-of-living index did not meet the legal thresholds that trigger their adjustment. See IRS Notice 2020-79 and IRS Revenue Procedure 2020-32 for additional IRS technical guidance.

Retirement Plan Limitation Highlights for 2021

The following chart lists the key dollar amounts for qualified retirement plans:

Description 2020 2021 Comment
IRC §402(g) limit on elective deferrals in 401(k) and 403(b) plans $19,500 $19,500 No Change
Catch-up contribution limit for employees age 50 or over in 401(k) and 403(b) plans $6,500 $6,500 No Change
Annual limit on compensation under §401(a)(17) $285,000 $290,000 Increase $5,000
Highly compensated employee compensation threshold $130,000 $130,000 No Change
Maximum contribution limit to a defined contribution plan $57,000 $58,000 Increase $1,000
Maximum limit on “annual benefit payments” under a defined benefit plan $230,000 $230,000 No Change
Maximum dollar limitation for key employee definition in top heavy plans $185,000 $185,000 Unchanged
Social Security Wage Cap $137,700 $142,800 Increase $5,100

 

Welfare and Fringe Benefit Limitation Highlights for 2021

Description 2020 2021 Comment
HSA contribution limit (employer + employee) Self-only: $3,550

Family: $7,100

Self-only: $3,600

Family: $7,200

Self-only Increase: $50

Family Increase: $100

HSA catch-up contributions (age 55 or older) $1,000 $1,000 No Change
HDHP minimum deductibles Self-only: $1,400

Family: $2,800

Self-only: $1,400

Family: $2,800

No Change

No Change

HDHP maximum out-of-pocket amounts (deductibles, co-payments and other amounts, but not premiums) Self-only: $6,900

Family: $13,800

Self-only: $7,000

Family: $14,000

Self-only Increase: $100

Family Increase: $200

Health FSA Contribution Limit $2,750 $2,750 No Change

 

What These Changes Mean for Employers

Employers that are plan sponsors should ensure that their payroll and administrative systems and formulas are updated to include the limits that have been adjusted. These limits are effective January 1, 2021. Employee communications and enrollment materials should also be updated.

Additionally, employers should consider that these limitation changes may affect nondiscrimination testing results and will increase the maximum permissible profit sharing allocations under a defined contribution plan and the maximum benefits available under a defined benefit plan. Employers should also review how the 2021 IRS limits impact their nonqualified deferred compensation plans regarding employee deferrals and employer contributions.

About the Author:

Roberta Granadier is an attorney in Dickinson Wright’s Troy office, where she practices in the area of employee benefits law. She has extensive experience with benefits issues in corporate transactions, executive compensation, ESOPs and public retirement plans. Roberta can be reached at 248-433-7552 or RGranadier@dickinsonwright.com and you can visit her bio here.