Benefit Plans: 2021 COLAs

October 27, 2020

By Compensation Planning & Employee Benefits Group

The Internal Revenue Service has announced the 2021 cost-of-living adjustments (COLAs) for retirement plans. Most limits have remained unchanged.

  • Annual compensation limit. The compensation limit for calculating benefits and contributions, for general and 401(k) discrimination testing and for determining tax deductions has increased to $290,000 for plan years beginning in 2021.
  • Elective deferrals (401(k)/Roth/403(b)/457). The calendar year elective deferral contribution limit remains unchanged at $19,500 in calendar year 2021.
  • Catch-up contributions. The calendar year dollar limitation for catch-up elective deferral contributions for individuals who, in 2021, are age 50 or above remains unchanged at $6,500 in calendar year 2021.
  • Highly compensated employee. For plan years ending in 2021, a “highly compensated employee” is one who (a) was a more-than-5% owner during the year or the preceding year, or (b) for the preceding year (i) had compensation in excess of $130,000 and (ii) if the employer elects for the plan year, was in the top-paid group of employees. (The top-paid group is the top 20 percent of the employees based on compensation.)
  • Defined contribution plans. The annual dollar limitation on additions to defined contribution plans has increased to $58,000 for plan limitation years ending in 2021.
  • Defined benefit plans. For plan limitation years ending in 2021, the annual dollar benefit limitation under a defined benefit plan remains unchanged at $230,000. For participants who separated from service before January 1, 2021, the 100 percent of average high-three-years’ compensation limit is computed by multiplying the participant’s compensation limitation, as adjusted through 2020, by 1.0122.
  • ESOP five-year distribution period. The dollar amount used in determining the maximum account balance in an employee stock ownership plan subject to a five-year distribution period has increased to $1,165,000 in 2021, while the dollar amount used to determine the lengthening of the five-year distribution period remains unchanged at $230,000.
  • Key employee in top-heavy plan. In defining who is a key employee in a top-heavy plan, for plan years ending in 2021, the compensation threshold for an officer remains unchanged at $185,000.
  • Social security taxable wage base. The social security taxable wage base for 2021 (applicable to integrated plans with plan years beginning in 2021) has increased to $142,800.

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