2021 Limits - Defined Contribution Plans
The Internal Revenue Service has published the 2021 limits for tax-qualified defined benefit and defined contribution plans. The limits cap the amount that participants can contribute to the plan and update the definitions used to administer tax-qualified and non-qualified plans.
Your TPA will help ensure these limits are enforced within your plan. But as the plan sponsor, you can help avoid problems by integrating some key limits into your payroll system. Two of the most important limits to incorporate into your payroll system are the maximum deferral limit and the annual compensation limit.
- Maximum Contribution Amount: The maximum amount a participant can contribute in 2021 remains unchanged from last year at $19,500 if they are under 50 years of age and $26,000 if they are 50 or over. Participants who are 50 years of age or older can contribute more than $19,500 because they can also contribute an additional $6,500 in catchup contributions. Check with your payroll company or software provider to make sure that this deferral limit is set properly in your system. Note that participants do not need to make a special "catchup" election. Your payroll system should automatically stop participants at $19,500 if they are under 50 years old, but allow those 50 or over to continue making contributions until they reach the combined limit of $26,000.
- Compensation Limit: The new compensation limit for 2021 is $290,000. This limit impacts the maximum amount an employee can receive in terms of employer contributions. For instance, if you make a 3% safe harbor non elective contribution and one of your executives makes $300,000, they should only receive 3% on $290,000 rather than on $300,000 since the last $10,000 of their compensation is over the 2021 compensation limit for plan purposes. Similarly, if you are matching your employee's contributions dollar for dollar up to 5% of their pay, the maximum match you will provide to a person is $14,500, which is 5% of $290,000. Many payroll systems will allow you to incorporate these limits into the system as well. First, determine your maximum contribution amount by multiplying your formula against the 2021 compensation limit of $290,000. If you need help with this calculation - give us a call! Then, enter this maximum contribution amount into your payroll contribution formula. This will ensure that your payroll system will automatically stop your matching contribution when the maximum contribution limit is hit.
- Key Employee Classification: Key Employees (officers), by salary, will be defined at $185,000 or higher. This remains unchanged from the 2020 IRS definition.
- Highly Compensated Employees: Employees making $130,000 or more in the prior plan year will be defined as Highly Compensated Employees (HCEs) by definition. This also remains unchanged from the 2020 IRS definition. This means employees earning $130,000 or more in the 2020 plan year, will be defined as Highly Compensated for 2021 Nondiscrimination Testing.
