IRS Notice 2019-59 just announced the 2020 retirement plan benefit limits and there are many changes since 2019. What does it all mean for employer-sponsored retirement plans? Here is a table of the main limits, followed by our analysis of the practical effects for both defined contribution (DC) and defined benefit (DB) plans.
Changes affecting both DB and DC plans
- Qualified compensation limit increases to $285,000. This is a similar increase to recent years, so highly-paid participants will now have more of their compensation “counted” towards qualified plan benefits and less towards non-qualified plans. This could also help plans’ nondiscrimination testing if the ratio of benefits to compensation decreases.
- HCE compensation threshold increases to $130,000. Employers may find that slightly fewer participants meet the new HCE compensation criteria, which could have two direct outcomes:
- Plans may see marginally better nondiscrimination testing results (including ADP results) if there are fewer HCEs. It could make a big difference for plans close to the pass/fail line.
- Fewer HCEs means that there are fewer participants who must receive 401(k) deferral refunds if the plan fails the ADP test.
Note that there is a “lookback” procedure when determining HCE status. This means the 2021 HCE determination is based on 2020 compensation and the $130,000 threshold.
DC-specific increases and their significance
- The annual DC 415 limit increases from $56,000 to $57,000 and the 401(k) deferral increases to $19,500. Savers will be glad to have more 401(k) deferral opportunity, albeit a modest $500 increase. Even though these deferrals count towards the total DC limit, employers can also increase their maximum profit sharing allocations. Individuals can potentially get up to $37,500 from employer matching and profit sharing contributions ($57,000 – $19,500) if the employer maximizes their DC plan deductions.
- 401(k) “catch-up” limit increases to $6,500. Participants age 50 or older get a $500 increase in their 401(k) catch-up opportunity after several years with a flat $6,000 limit. This means they can effectively get a maximum DC deduction of $63,500 ($57,000 + $6,500).
DB-specific increases and their significance
- DB 415 maximum benefit limit (the “dollar” limit) increases to $230,000. This is the fourth straight year we’ve seen an increase in the DB 415 limit, after three years of static amounts. The effect is that individuals who have very large DB benefits (say, shareholders in a professional firm cash balance plan) could see a deduction increase if their benefits were previously constrained by the 415 dollar limit.
Social Security wage base and integrated plans
- Social Security Taxable Wage Base increases to $137,700. This is a $4,800 increase from last year’s base. A higher wage base can reduce the rate of pension accruals and DC allocations for highly-paid participants in integrated pension and profit sharing plans that provide higher rates above the wage base.