IRS Increases Overall Annual Contribution Limit for 401(K), But Individual Salary Deferral Amount Unchanged
- In late October 2020, the IRS boosted 2021 annual contribution and annual compensation limits on 401(k), 403(b), and most 457 plans.
- Annual contribution limit for a defined contribution plan increased $1,000 and is now $58,000, and the annual compensation limit increased $5,000 and is $290,000.
For the first time since 2017, the Internal Revenue Service (IRS) did not increase the annual contribution limit for individuals using a workplace-sponsored 401(k) plan, a 403(b) plan, or most 457 plans when it released its cost-of-living adjustments for 2021.
The elective salary deferral limit for an individual remains $19,500. For employees 50 and older, there also was no change in the catch-up contribution limit ($6,500).
However, the annual cap for individuals overall did get a bump of $1,000 to $58,000, (for individuals 50 and older, the limit is $64,500 with the annual catch-up contribution limit), while the annual compensation limit saw a $5,000 increase and is now $290,000.
IRS Cost of Living Adjustments for 2020-21
|Annual Compensation (401(a)(17) Limit)||$290,000||$285,000|
|Highly Compensated Employee (HCE) Compensation (414(q) Limit)||$130,000||$130,000|
|Key Employee (officer) Compensation (416 Limit)||$185,000||$185,000|
|Flexible Spending Account (Health FSA) (125 Limit)||$2,750||$2,750|
|Dependent Care Account (125 Limit)||$5,000||$5,000|
|Health Savings Accounts (HSA)|
|Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) (9831 Limit)|
Time to Consider Offering a Retirement Plan
In spite of no increase in contribution limits (elective salary deferral) for individuals, businesses should still consider establishing a retirement savings plan to take advantage of everything a plan can do for their company while helping their employees save for a dignified retirement.
There remains a retirement savings crisis in the United States, which nearly a dozen states have tried to address over the past five years with state-sponsored retirement programs while more than a dozen others have introduced legislation.
The benefits of implementing a retirement savings plan include the ability of a small business to compete with a larger company for high-quality candidates by offering a desirable benefit, which can help enhance employee engagement. Plus, a business can reap the benefits that come at tax time by lowering the overall tax liability. Business owners also can start planning their own retirement.
Paychex offers plan options designed to help businesses of all sizes that are considering starting a 401(k), or considering switching their current retirement plan.