IRS has announced the 2021 cost-of-living adjustments (COLAs) with respect to retirement plan limits. Many limits, which are adjusted by reference to Code Sec. 415(d), are changed for 2021 since the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment. However, others remain unchanged. Certain dollar limit changes keyed to Code Sec. 1(f)(3) have also increased.
The following plan limits are increased effective January 1, 2021:
Defined contribution plans. The limit on the annual additions to a participant's defined contribution account under Code Sec. 415(c)(1)(A) increases from $57,000 to $58,000 for 2021.
ESOP 5-year distribution period. The dollar amount under Code Sec. 409(o)(1)(C)(ii) for determining the maximum account balance in an employee stock ownership plan (ESOP) subject to a 5-year distribution period increases from $1,150,000 to $1,165,000 for 2021, while the dollar amount used to determine the lengthening of the 5-year distribution period remains unchanged at $230,000 for 2021.
Government plans subject to the grandfather rule. The annual compensation limitation under Code Sec. 401(a)(17) for eligible participants in certain governmental plans that, under the plan as in effect on July 1, 1993 allowed COLAs to the plan's compensation limit under Code Sec. 401(a)(17) to be taken into account, increases from $425,000 to $430,000 for 2021.
Simplified employee pensions (SEPs). The compensation limit under Code Sec. 408(k)(2)(C) (amount of compensation above which an employee who meets other requirements must be able to participate in the employer's SEP plan) increases from $600 to $650 for 2021.
Control employee. The employee compensation amount used in the definition of 'control employee' for fringe benefit valuation purposes under Reg § 1.61-21(f)(5)(iii) increases from $230,000 to $235,000 for 2021, and the compensation amount under Reg § 1.61-21(f)(5)(i) remains unchanged at $115,000 for 2021.
Systemically important plan. The threshold used to determine whether a multi-employer plan is a systemically important plan under Code Sec. 432(e)(9)(H)(v)(III)(aa) increases from $1,135,000,000 to $1,176,000,000 for 2021.
The following plan limits are unchanged:
Defined benefit plans. The limitation on the annual benefit under a defined benefit plan under Code Sec. 415(b)(1)(A) remains unchanged at $230,000 for 2021. For participants who separated from service before January 1, 2021, the 100% of average high-three-years' compensation under Code Sec. 415(b)(1)(B) is computed by multiplying the participant's compensation limitation, as adjusted through 2020, by 1.0122.
Elective deferrals. The Code Sec. 402(g)(1) limit on the exclusion for elective deferrals described in Code Sec. 402(g)(3) remains unchanged at $19,500 for 2021. This limitation affects elective deferrals to Code Sec. 401(k) plans, Code Sec. 403(b) plans, and the Federal Government's Thrift Savings Plan.
Key employee in top-heavy plan. The dollar limit under Code Sec. 416(i)(1)(A)(i) relating to the definition of a key employee in a top-heavy plan remains unchanged at $185,000 for 2021.
Highly compensated employee. The dollar limit used in defining a highly compensated employee (HCE) under Code Sec. 414(q)(1)(B) remains unchanged at $130,000 for 2021.
Catch-up contributions. The dollar limit under Code Sec. 414(v)(2)(B)(i) for catch-up contributions to an applicable employer plan other than a plan described in Code Sec. 401(k)(11) (SIMPLE 401(k) plan) or Code Sec. 408(p) (SIMPLE IRA) for individuals aged 50 or over remains unchanged at $6,500 for 2021. The dollar limit under Code Sec. 414(v)(2)(B)(ii) for catch-up contributions to an applicable employer plan described in Code Sec. 401(k)(11) or Code Sec. 408(p) for individuals aged 50 or over remains at $3,000 for 2021.
SIMPLE accounts. The maximum amount of compensation an employee may elect to defer under Code Sec. 408(p)(2)(E) for a SIMPLE plan remains unchanged at $13,500 for 2021.
Government, etc. deferred compensation plans. The limit on deferrals under Code Sec. 457(e)(15), concerning deferred compensation plans of state and local governments and tax-exempt organizations, remains unchanged at $19,500 for 2021.
Gratuitous transfers of employer securities. The limitation under Code Sec. 664(g)(7) concerning the qualified gratuitous transfer of qualified employer securities to an ESOP remains $50,000 for 2021.
Premiums on longevity annuity contracts. The dollar limitation on premiums paid with respect to a qualifying longevity annuity contract under Reg § 1.401(a)(9)-6, Q&A-17(b)(2)(i), remains unchanged at $135,000 for 2021.
The following plan limits are calculated by reference to Code Sec. 1(f)(3):
IRA and Roth IRA income limits. The deductible amount under Code Sec. 219(b)(5)(A) for an individual making qualified retirement contributions remains $6,000 for 2021.
Saver's credit AGI amounts. The adjusted gross income (AGI) figures for the saver's credit increased as indicated below. Under the credit, an eligible lower-income taxpayer can claim a nonrefundable tax credit for the applicable percentage (50%, 20%, or 10%, depending on filing status and AGI) of up to $2,000 of his or her qualified retirement savings contributions.
For 2021, the AGI limitation under Code Sec. 25B(b)(1)(A) for determining the retirement savings contributions credit for married taxpayers filing a joint return increased from $39,000 to $39,500; the limitation under Code Sec. 25B(b)(1)(B) increases from to $42,500 to $43,000; and the limitation under Code Sec. 25B(b)(1)(C) and Code Sec. 25B(b)(1)(D) increases from $65,000 to $66,000.
For 2021, the AGI limitation under Code Sec. 25B(b)(1)(A) for determining the retirement savings contributions credit for taxpayers filing as head of household is increased from $29,250 to $29,625; the limitation under Code Sec. 25B(b)(1)(B) is increased from $31,875 to $32,250; and the limitation under Code Sec. 25B(b)(1)(C) and Code Sec. 25B(b)(1)(D) is increased from $48,750 to $49,500.
For 2021, the AGI limitation under Code Sec. 25B(b)(1)(A) for determining the retirement savings contributions credit for all other taxpayers is increased from $19,500 to $19,750; the limitation under Code Sec. 25B(b)(1)(B) is increased from $21,250 to $21,500; and the limitation under Code Sec. 25B(b)(1)(C) and Code Sec. 25B(b)(1)(D) is increased from $32,500 to $33,000.
