United States

IRS releases 2020 retirement plan limitations

TAX ALERT  | 

In Notice 2019-59, the IRS published applicable annual limitations and maximums for contributions and benefits provided under qualified retirement plans. The following chart summarizes the most commonly used limitations and maximums.

Most notably, catch-up contributions for those age 50 and over increased for most plans after remaining the same since 2015. Refer to the notice for other applicable limitations not shown below. 

Limitation

2019

2020

Elective deferral to section 401(k), section 403(b), certain section 457, and Thrift Savings plans

 

 

$19,000

 

$19,500

Definition of ‘highly compensated employee’ under section 414(q)(1)(B)

 

 

$125,000

 

$130,000

Catch-up contribution for those age 50 and over (in section 401(k), section 403(b), certain section 457 and Thrift Savings plans)

 

 

$6,000

 

$6,500

Catch-up contribution for those age 50 and over for SIMPLE-IRA or SIMPLE-401(k) plan

 

 

$3,000

 

$3,000

Defined contribution plan annual addition (or limited to compensation, if less)

 

 

$56,000

 

$57,000

Defined benefit plan annual benefit (or limited to 100% of average compensation in three highest paid years, if less)

 

 

$225,000

 

$230,000

Compensation for SEP inclusion

 

$600

$600

Annual compensation limit (generally applicable to section 415 benefit and allocation calculations)

 

 

$280,000

 

$285,000

SIMPLE-IRA and SIMPLE-401(k) elective deferral limit

 

$13,000

$13,500

Maximum IRA contribution

 

$6,000

$6,000

IRA catch-up contribution for those age 50 and over*

 

$1,000

$1,000

Deferrals under section 457(e)(15) concerning deferred compensation plans of state and local governments and tax-exempts

 

 

$19,000

 

$19,500

*    The IRA catch-up limit is set by statute and it does not increase for cost-of-living adjustments.

Action items

Employers: 

Adjustments in limitations may require employers to coordinate with their payroll provider (in-house or external) and retirement plan administrators to ensure the proper updating of plan-related systems. 

In addition, employers should be preparing to distribute various annual notices required for calendar year retirement plans, as applicable. The following notices are due soon:

  • • Qualified Default Investment Alternative Notice – at least 30 days in advance of subsequent plan year
  • • Qualified Automatic Contribution Arrangement and Eligible Automatic Contribution Arrangement Notice – between 30 and 90 days before the beginning of the plan year
  • • SIMPLE IRA Notice – before Nov. 2, which begins the 60 day election period
  • • Safe Harbor 401(k) Notice – between 30 and 90 days before the beginning of the plan year

Where appropriate, employers should review Notice 2019-59 in full and coordinate internal efforts with those of their external plan administrator to ensure processes are updated to reflect any applicable limitation changes by Jan. 1 and to comply with upcoming disclosure deadlines.

Business owners:

With the section 199A deduction expiring for tax years beginning after Dec. 31, 2025, owners of pass-through entities should consider the impact of section 199A when identifying the most tax-efficient strategy for qualified retirement plan contributions. For businesses that will qualify for a section 199A deduction, qualified business income will have an approximate federal tax rate of 29.6% while distributions from qualified retirement plans may be taxed at 37% if the individual is in the highest federal tax bracket. In addition, contributions to qualified retirement plans are not included in current taxable income which may help owners fall below the income thresholds so they can qualify for the section 199A deduction, if it may otherwise be limited. Therefore, the entire landscape must be considered when choosing the most tax-efficient retirement planning strategy for owners of pass-through entities. For more detail on this planning, see Pass-through compensation: Lessons learned from the 2018 tax season.

AUTHORS


Subscribe to Tax Alerts



How can we help your company with compensation and benefits tax planning?