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IRS Raises 401(k) Contribution Limits for 2020

The 2020 contribution limits for 401(k), 403(b), and most 457 plans have been raised for a third straight year, increasing by $500 the amount plan participants can contribute. This is an opportune time to consider offering a retirement plan if you don't do so already.
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  • In late October 2019, the IRS boosted annual contribution limits for 2020 for 401(k), 403(b), and most 457 plans.
  • Plan participants can contribute up to $19,500 for 2020, which is up from $19,000 for 2019.
  • This is a good time to consider adding a retirement savings program to your benefits menu, if your firm doesn't yet have one.

Annual savings ceiling boosted $500

Employees using a workplace-sponsored 401(k) plan, a 403(b) plan, or most 457 plans — available for government and certain non-government employers — will be able to contribute an additional $500 per year in 2020. The Internal Revenue Service (IRS) raised the annual contribution limits for 2020 to $19,500, which amounts to a cost-of-living adjustment and is an increase from $19,000 in 2019.

It marks the third straight year the IRS has added a $500 bump, following no increases for three years (2015-17).

For employees 50 and older, the catch-up contribution limit increased to $6,500 for workplace plans. When pooled together, a worker who is 50 and older can save as much as $26,000 in a 401(k) plan — even if the individual doesn’t turn 50 until Dec. 31, 2020.  

Time to consider offering a retirement plan

While the size of the increase to the 401(k) plan contribution limit is relatively modest, the boost signals an opportune time to consider adding a retirement savings program to your benefits menu if you don't already have one.

Although the savings rate among Americans today is low — a little more than half of all workers (55 percent) participate in a workplace retirement plan, according to the Bureau of Labor Statistics’ National Compensation Survey for 2018, sparking 10 states to begin implementing state-sponsored retirement programs and more than a dozen others to introduce legislation — increases in contribution limits could lead to an increase in the need for a savings plan. However, more than half of the small-business owners recently surveyed by Paychex said they don’t offer a retirement plan, citing they didn’t see the benefit.

The benefits of establishing a retirement savings plan are both short and long term for a business and its employees. A 401(k) plan can attract and retain talent — similar to competitive salaries — plus enhance employees’ retirement-readiness, and deliver benefits such as tax savings for the business and elevated engagement by employees.

Small-business owners should also use this time to develop their own succession plan, including funding your own retirement.  As you consider implementing a retirement savings plan for employees, also consider your retirement. You also might gain access to better plans for yourself.

Paychex offers retirement plan options designed to help businesses of all sizes that are considering starting a 401(k), or considering switching their current retirement plan.

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Maree P Vahue, MBA, QKA, is a professionally accredited Retirement Services Compliance Analyst II for Paychex, Inc. based in Rochester, NY.
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