David J. Kupstas, FSA, EA, MSEA Chief Actuary
As we head toward the close of this turbulent year, we have learned that most IRS limits related to qualified retirement plans will hold steady in 2021. Retirees receiving Social Security benefits will receive another modest increase, while PBGC premiums continue their steady climb higher.
Further details about these recent announcements from the IRS, Pension Benefit Guaranty Corporation (PBGC), and Social Security Administration (SSA) are below. The numbers are summarized in this handy chart.
Qualified Plan Limits
According to Notice 2020-79, these limits will rise in 2021:
- The annual addition limitation for defined contribution plans under §415(c)(1)(A) is increased from $57,000 to $58,000.
- The annual compensation limit under §§401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) is increased from $285,000 to $290,000.
- The dollar amount under §409(o)(1)(C)(ii) for determining the maximum account balance in an employee stock ownership plan subject to a 5-year distribution period is increased from $1,150,000 to $1,165,000.
- The compensation amount under §408(k)(2)(C) regarding eligibility for simplified employee pensions (SEPs) is increased from $600 to $650.
Most other limits will remain at their 2020 levels:
- The limitation on the annual benefit under a defined benefit plan under §415(b)(1)(A) remains unchanged at $230,000.
- The elective deferral limit under §402(g)(1) for 401(k) and certain other plans remains unchanged at $19,500.
- The dollar limitation under §416(i)(1)(A)(i) concerning the definition of “key employee” in a top-heavy plan remains unchanged at $185,000.
- The dollar amount used to determine the lengthening of the 5-year distribution period in an employee stock ownership plan remains unchanged at $230,000.
- The limitation used in the definition of “highly compensated employee” under §414(q)(1)(B) remains unchanged at $130,000. Note that this will affect the determination of Highly Compensated Employees for the 2022 plan year since HCE status is based on previous year’s pay. HCE status for 2021 will be based on the 2020 compensation threshold, which was also $130,000.
- The dollar limitation under §414(v)(2)(B)(i) for catch-up contributions to 401(k) plans for individuals aged 50 or over remains unchanged at $6,500. Given the 415(c) increase to $58,000, this means there is effectively an annual addition limit of $64,500 for some participants 50 and older.
- The dollar limitation under §414(v)(2)(B)(ii) for catch-up contributions to SIMPLE IRA or 401(k) plans for individuals aged 50 or over remains unchanged at $3,000.
- The deferral limitation under §408(p)(2)(E) for SIMPLE plans remains unchanged at $13,500.
- The deductible amount under §219(b)(5)(A) for Individual Retirement Account contributions remains unchanged at $6,000.
For plan years beginning in 2021:
- The per-participant flat premium rate is $86 for single-employer plans (up from a 2020 rate of $83).
- The variable-rate premium for single-employer plans is $46 per $1,000 of unfunded vested benefits, up from a 2020 rate of $45.
- The variable-rate premium is capped at $582 times the number of participants (up from a 2020 cap of $561). Plans sponsored by small employers (generally fewer than 25 employees) may be subject to a lower cap.
The rates and cap will continue to be indexed for wage growth annually.
Social Security Payments and Taxable Wage Base
Monthly Social Security and Supplemental Security Income benefits for approximately 70 million Americans will increase 1.3 percent in 2021, according to a Social Security Administration press release from earlier this month.
The maximum amount of earnings subject to the Social Security tax (the “taxable wage base”) will increase to $142,800 from $137,700.