The beginning of the year is often a busy time for retirement plan sponsors, especially in smaller organizations where the company’s retirement plan committee members are tasked with sales and operational matters which may seem more pressing than reviewing the company-sponsored 401(k) or other retirement plan(s). However, as fiduciaries, plan sponsors must ensure plans comply with all applicable Department of Labor (DOL) and IRS requirements and must adhere to their obligations to communicate certain information to plan participants.[i]
In Notice 2020-79, the IRS recently released its annual update to retirement plan limits for the 2021 tax year.[ii] Plan sponsors should work with plan administrators and record-keepers to ensure systems are updated and employee notices are prepared and delivered in a timely manner, pursuant to your service agreements.[iii]
Traditional 401(k) and Other Defined Contribution Plan Contribution Limits
If your organization sponsors a 401(k), 403(b), or 457 plan, the employee elective deferral limit for the 2021 tax year remains unchanged from 2020 at $19,500.[iv] 401(k) plan participants who will be age 50 or older on December 31, 2021 can contribute an additional $6,500 in elective deferrals to their 401(k) account in 2021 as “catch-up” contributions.[v] Effectively, this means that a plan participant who meets the age requirement may contribute up to $26,000 in elective deferrals for the year.
Plan sponsors must also be aware that the 2021 overall limit on contributions is $58,000, up from $57,000 in 2020. This means that the employer’s salary deferrals, the employer’s contributions, and any allocated forfeitures may not exceed this amount.[vi]
Highly-compensated and key employees, as those terms are defined by the IRS[vii], are subject to additional tests. The employee compensation limit for calculating contributions in 2021 is $290,000 (up from $285,000 in 2020), with the threshold for nondiscrimination testing for this group remaining at $130,000. The nondiscrimination testing threshold for key employees is unchanged in 2021 at $185,000.
Other Retirement Plan Limits
If your company sponsors a SIMPLE IRA or SEP IRA plan for employees, the plan limits for 2021 are also largely unchanged. Employees participating in a SIMPLE IRA may contribute up to $13,500 this year, with a catch-up deferral contribution opportunity of up to $3,000 for those who will be at least 50 years old on the last day of the year[viii].
For SEP IRAs, including grandfathered SARSEP accounts established before 1997, employers may contribute up to the lesser of $58,000 or 25 percent of the employee’s compensation to the SEP account, and the employee with a grandfathered SARSEP may contribute up to the lesser of $19,500 or 25 percent of their compensation.[ix]
Take a Proactive Approach to Retirement Plan Compliance
If your retirement plan committee has not already done so, conduct a review of your company-sponsored plan(s)[x], perform annual nondiscrimination testing[xi], and provide notices to plan participants if required.[xii] If your agreements with the plan’s financial professional, record-keeper, or administrator provide that they will handle one or more of these tasks for the plan, verify completion. Ultimately, you, as the plan sponsor, are responsible for ensuring your company-sponsored plan(s) comply with IRS and DOL regulations.[xiii]
Important Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal advisor.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
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[i] https://www.dol.gov/general/topic/retirement/planinformation
[ii] https://www.irs.gov/pub/irs-drop/n-20-79.pdf
[iii] https://www.irs.gov/retirement-plans/plan-sponsor/a-plan-sponsors-responsibilities
[iv] https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits
[v] https://www.irs.gov/retirement-plans/401k-plan-catch-up-contribution-eligibility
[vi] https://www.irs.gov/retirement-plans/401k-plans-deferrals-and-matching-when-compensation-exceeds-the-annual-limit
[vii] https://www.irs.gov/retirement-plans/plan-participant-employee/definitions
[viii] https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-simple-ira-contribution-limits
[ix] https://www.irs.gov/retirement-plans/plan-participant-employee/sep-contribution-limits-including-grandfathered-sarseps
[x] https://www.irs.gov/retirement-plans/have-you-had-your-retirement-plan-checkup-this-year
[xi] https://www.irs.gov/retirement-plans/401k-plan-fix-it-guide-the-plan-failed-the-401k-adp-and-acp-nondiscrimination-tests
[xii] https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-notices
[xiii] https://www.irs.gov/retirement-plans/checking-retirement-plan-provider-reports