IRS has just announced the 2021 pension plan limits — and surprised many employers in the process.
In an unexpected move, the Taxman will hold many pension plan limits steady, including several of the “biggies.” Of course some other limits will increase.
Here’s what you need to make sure Payroll is ready come January.
What’s holding, what’s increasing
These pension plan limits are among those that will stay the same for 2021, according to IRS Notice 2020-79:
- the 401(k) individual contribution limit: $19,500
- the deductible amount under § 219(b)(5)(A) for an individual making qualified retirement contributions: $6,000
- the limitation on the annual benefit under a defined benefit plan under § 415(b)(1)(A): $230,000
- the dollar limit under § 416(i)(1)(A)(i) concerning the definition of “key employee” in a top-heavy plan: $185,000, and
- the limitation under § 408(p)(2)(E) regarding SIMPLE retirement accounts: $13,500.
Some limits will tick up for 2021 over 2020’s numbers. Among them: the compensation amount regarding simplified employee pensions ($650) and the limitation for defined contribution plans under § 415(c)(1)(A) ($58,000).
A new job for Payroll
Just because Payroll doesn’t have a new 401(k) limit to contend with doesn’t mean there’s less work to do. One big change mandated by the brand-new SECURE Act will affect how many employees are eligible to participate in your retirement plan. And that’ll create more work for Payroll.
The SECURE Act makes part-time employees eligible to participate in retirement plans. To participate, employees must have worked at least 500 hours a year for three consecutive years.
To meet the new requirements, Payroll and HR may have to look at hire dates and annual hours of service for their part-time workers. You’ll also have to track their hours carefully starting Jan. 1, 2021, so you’ll know when they’re eligible to sign up.
Tip: From a recordkeeping standpoint, it might be easier to give part-time employees the chance to participate in your retirement plan once they hit 500 service hours in 2021 instead of combing over past records.