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IRS Increases Overall Annual Contribution Limit for 401(K), But Individual Salary Deferral Amount Unchanged

The Internal Revenue Service (IRS) released its cost-of-living adjustments for 2021, but there will be no increase in the annual contribution limit for individuals using a workplace-sponsored retirement plan.
A woman goes over the latest contribution limits on her phone.
  • 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

IRS limit 2021 2020
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)    
  • HDHP Minimal Annual Deductible - Single
$1,400 $1,400
  • HDHP Minimum Annual Deductible - Family
$2,800 $2,800
  • HDHP Out-of-Pocket Maximum - Single
$7,000 $6,900
  • HDHP Out-of-Pocket Maximum - Family
$14,000 $13,500
  • HSA Maximum Contribution Limit - Single
$3,600 $3,550
  • HSA Maximum Contribution Limit - Family
$7,200 $7,100
  • HSA Catch-up Contribution Limit (age 55)
$1,000 $1,000
Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) (9831 Limit)    
  • Reimbursement Limit - Single
$5,300 $5,250
  • Reimbursement Limit - Family
$10,700 $10,600

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.

Looking forward

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.

Female author icon
Maree P. Vahue, MBA, QKA, is a professionally accredited Retirement Services Compliance Analyst II for Paychex, Inc. who concentrates in retirement plan, S125 and HSA Administration. She leads monitoring and analysis of ERISA legislative and regulatory changes within the retirement services and S125 compliance disciplines.
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* This content is for educational purposes only, is not intended to provide specific legal advice, and should not be used as a substitute for the legal advice of a qualified attorney or other professional. The information may not reflect the most current legal developments, may be changed without notice and is not guaranteed to be complete, correct, or up-to-date.

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