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On October 26, 2020, the Internal Revenue Service released Notice 2020-79, announcing cost-of-living adjustments that affect contribution limits for retirement plans and retirement accounts in 2021. The list below, although not exhaustive, highlights key changes that retirement plan sponsors should be aware of, as well as several limitations that remain unchanged from 2020:

• The elective deferral limit remains unchanged at $19,500.
• The catch-up contribution limit for employees age 50 and older remains unchanged at $6,500.
• The aggregate contribution limit for defined contribution plans is increasing from $57,000 to $58,000.
• The annual compensation limit used to calculate contributions is increasing from $285,000 to $290,000.
• The limitation on the annual benefit under a defined benefit plan remains unchanged at $230,000. (For a participant who separated from service before January 1, 2021, the limitation for defined benefit plans under Section 415(b)(1)(B) can be computed by multiplying the participant’s compensation limitation, as adjusted through 2020, by 1.0122.)
• The dollar limit used in the definition of “key employee” in a top-heavy retirement plan remains unchanged at $185,000.
• The dollar limit used in the definition of “highly compensated employee” remains unchanged at $130,000.

The table below displays the 2020 and 2021 limits for a host of tax breaks:

¹ Employee deferrals to all 401(k) and 403(b) plans must be aggregated for purposes of this limit.

² Contributors must be age 50 or older during the calendar year.

³ All compensation from a single employer (including all members of a controlled group) must be aggregated for purposes of this limit.
 

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Investors should consult a tax preparer, professional tax advisor, and/or a lawyer.

© 2021 Commonwealth Financial Network^®

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