On November 6, 2019, the IRS released its annual notice setting forth the various dollar limitations for contributions and benefits under qualified retirement plans, including 401(k) plans. The adjusted limits will be in effect as of January 1, 2020. As in prior years, the law requires that some of these limits be adjusted to reflect increases in the most recent cost-of-living index, while other limits remain unchanged. This time around, most of the limits directly relevant to 401(k) plans have, in fact, been increased.
401(k) Adjusted Limits for 2020. The most frequently encountered dollar limits for 401(k) plans, that will increase in 2020 from the parallel dollar limits that are in effect for 2019, are as follows:
- The dollar limit for employee 401(k) elective deferral contributions is increased from $19,000 in 2019 to $19,500 in 2020.
- The dollar limit for “catch-up” contributions (this applies to employees who reach age 50 or older during the calendar year) is increased from $6,000 in 2019 to $6,500 in 2020.
- The maximum contribution limit (or limit on “annual additions,” which takes into account both employer and employee contributions) under defined contribution plans (including 401(k) plans) is increased from $56,000 in 2019 to $57,000 in 2020.
- The maximum amount of compensation that may be taken into account for qualified plan (including 401(k) plan) purposes is increased from $280,000 in 2019 to $285,000 in 2020.
- The dollar limit threshold for determining who is a “highly compensated employee” for nondiscrimination testing purposes is increased from $125,000 in 2019 to $130,000 in 2020.
- The dollar limit threshold for determining who is a “key employee” for purposes of determining whether a plan is “top-heavy” (another type of nondiscrimination test) is increased from $180,000 in 2019 to $185,000 in 2020.
Other Adjusted Limitations. In addition to the above adjustments that pertain directly to 401(k) plans, Notice 2019-59 also makes certain other adjustments for 2020, including adjustments to the dollar limits that apply to:
- Defined benefit retirement plans;
- Employee stock ownership plans (“ESOPs”);
- Simplified employee pensions (“SEPs”);
- Governmental plans;
- Individual retirement accounts (“IRAs”);
- “Roth” IRAs; and
- Determinations as to the Retirement Savings Contribution Credit for low-income and moderate-income level employees.
In a separate release, the Social Security Administration (“SSA”) announced that the Social Security taxable wage base for 2020 will increase from $132,900 in 2019 to $137,700 in 2020.
Key Take-Away. Plan administrators, Human Resources personnel, payroll managers, and others affected by the adjusted limits should make sure that their systems are timely updated to reflect the 2020 changes, and to inform employees about the new 2020 dollar limits in all relevant communications (for example, year-end open enrollment materials). Summary plan descriptions (“SPDs”), plan guidelines and procedures, and similar documents also will need to be reviewed and revised, as required. Most plan documents do not require amendments to reflect the adjusted limits; if you are in doubt, please ask your ERISA attorney or advisor to review your plan document to make sure.
As always, for specific questions regarding 401(k) dollar limitations and all other compliance issues, please consult your own ERISA attorney or advisor. The information and content contained in this blog post are for general informational purposes only, and does not, and is not intended to, constitute legal advice.