401(k): IRS Releases 2021 Adjusted Dollar Limits

On October 26, 2020, the IRS released its annual notice, Notice 2020-79, setting forth the various dollar limitations for contributions and benefits under qualified retirement plans, including 401(k) plans. The new limits will be in effect as of January 1, 2021. As in prior years, the law requires that some of these limits be adjusted to reflect increases in the most recent cost-of-living index, while other limits remain unchanged. This year, there are relatively fewer changes for 401(k) plans as contrasted with prior years.

401(k) Adjusted Limits for 2021. The two most frequently encountered dollar limits for 401(k) plans, that will increase in 2021 from the parallel dollar limits that are in effect for 2020, are as follows:

• The maximum contribution limit (or limit on “annual additions,” which takes into account both employer and employee contributions) under defined contribution plans (including 401(k) plans) is increased from $57,000 in 2020 to $58,000 in 2021.
• The maximum amount of compensation that may be taken into account for qualified plan (including 401(k) plan) purposes is increased from $285,000 in 2020 to $290,000 in 2021.

These Limits Remain Unchanged for 2021. The following dollar limits applicable to 401(k) plans will not increase from the amount in place during 2020:

• Notably, the dollar limit for employee 401(k) elective deferral contributions remains unchanged from the 2020 limit at $19,500 in 2021.
• Similarly, the dollar limit for “catch-up” contributions (which applies to employees who reach age 50 or older during the calendar year) remains unchanged from the 2020 limit at $6,500 in 2021.
• The dollar limit threshold for determining who is a “highly compensated employee” for 401(k) plan nondiscrimination testing purposes remains unchanged from the 2020 limit at $130,000 in 2021.
• The dollar limit threshold for determining who is a “key employee” for purposes of determining whether a 401(k) plan is “top-heavy” (another type of nondiscrimination test) remains unchanged from the 2020 limit at $185,000 in 2021.

Other Adjusted Limitations for 2021. In addition to the above adjustments that pertain directly to 401(k) plans, Notice 2020-79 also makes certain other retirement plan-related adjustments for 2021, including adjustments to the dollar limits that apply to:

• Defined benefit retirement plans;
• Employee stock ownership plans (“ESOPs”);
• Simplified employee pensions (“SEPs”);
• “SIMPLE” retirement plans;
• Governmental plans;
• Individual retirement accounts (“IRAs”);
• “Roth” IRAs;
• Limits applicable to multiemployer plans; and
• Determinations as to the Retirement Savings Contribution Credit for low-income and moderate-income level employees.

As is the case with 401(k) plan limits, certain of the above limits increase for 2021, while others remain unchanged from the dollar limits in effect for 2020. For details, please refer to the Notice itself.

Social Security Taxable Wage Base for 2021. In a separate release, the Social Security Administration (“SSA”) announced on October 13, 2020 that the Social Security taxable wage base for 2021 will increase from $137,700 in 2020 to $142,800 in 2021.

Key Take-Away. Plan administrators, Human Resources personnel, payroll managers, and others affected by the adjusted limits should make sure that their systems are timely updated to reflect the 2021 changes, and to inform employees about the new 2021 dollar limits in all relevant communications (for example, year-end open enrollment materials). Summary plan descriptions (“SPDs”), plan guidelines and procedures, and similar documents also will need to be reviewed and revised, as required. Most plan documents themselves do not require amendments to reflect the adjusted limits. If you are in doubt, please ask your ERISA attorney or advisor to review your plan document to make sure.

The information and content contained in this blog post are for general informational purposes only, and does not, and is not intended to, constitute legal advice. As always, for specific questions concerning your 401(k) retirement plan, or for help in operating your plan during the current COVID-19 crisis, please consult your own ERISA attorney or professional advisor.