2020 Retirement Plan and Benefits Contribution Limits

2020 Retirement Plan and Benefits Contribution Limits

Fulcrum Partners Deferred Compensation News

On Wednesday, November 6, the Internal Revenue Service (IRS) announced its updated dollar limitations for tax-qualified, defined benefit and defined contribution plans. This guidance provides tax year 2020, cost‑of‑living adjustments (COLA), affecting dollar limitations for pension plans and other retirement-related items. The limits are important for both tax-qualified plans, and many nonqualified deferred compensation plans.

The updates were published in Notice 2019-59, and posted on IRS.gov. You can also read the full text of Notice 2019-59 at the end of this Summary.

Overview of 2020 Retirement Plan and Benefits Contribution Limits

Effective January 1, 2020:

  • The dollar limitation under § 416(i)(1)(A)(i) concerning the definition of “key employee” in a top-heavy plan increased from $180,000 to $185,000.
  • The limitation used in the definition of “highly compensated employee” under§ 414(q)(1)(B) increased from $125,000 to $130,000.
  • The contribution limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan increased from $19,000 to $19,500.
  • The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $6,000 to $6,500.
  • The annual compensation limit under §§ 401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) increased from $280,000 to $285,000.
  • The limitation for defined contribution (DC) plans under § 415(c)(1)(A) increased from $56,000 to $57,000.
  • The limitation on the annual benefit under a defined benefit (DB) plan under § 415(b)(1)(A) increased from $225,000 to $230,000.

Individual Retirement Accounts (IRAs) Remain Unchanged

The limit on annual contributions to an IRA remains unchanged at $6,000. The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.

 

At-A-Glance Summary of Select COLA Adjustments 2020

 

2019 Limit

2020 Limit

Key Employee (Officers) Limit

$180,000

$185,000

Highly Compensated Employees (HCEs) Limit

$125,000

$130,000

Dollar Limit on Elective Deferrals

$19,000

$19,500

Catch-up Contribution Limit

$6,000

$6,500

Annual Compensation Limit

$280,000

$285,000

Section 415 Annual Additions Limit

$56,000

$57,000

Defined Benefit Plan Limit

$225,000

$230,000

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The Complete Text of Notice 2019-59:

2020 Limitations Adjusted As Provided in Section 415(d), etc. Notice 2019-59

Section 415 of the Internal Revenue Code (the Code) provides for dollar limitations on benefits and contributions under qualified retirement plans. Section 415(d) requires that the Secretary of the Treasury annually adjust these limits for cost-of-living increases. Other limitations applicable to deferred compensation plans are also affected by these adjustments under § 415. Under § 415(d), the adjustments are to be made under adjustment procedures similar to those used to adjust benefit amounts under § 215(i)(2)(A) of the Social Security Act.

Cost-of-Living Adjusted Limits for 2020

Effective January 1, 2020, the limitation on the annual benefit under a defined benefit plan under § 415(b)(1)(A) is increased from $225,000 to $230,000.

For a participant who separated from service before January 1, 2020, the participant’s limitation under a defined benefit plan under §415(b)(1)(B) is computed by multiplying the participant’s compensation limitation, as adjusted through 2019, by 1.0176.

The limitation for defined contribution plans under § 415(c)(1)(A) is increased in 2020 from $56,000 to $57,000.

The Code provides that various other dollar amounts are to be adjusted at the same time and in the same manner as the dollar limitation of § 415(b)(1)(A). After taking into account the applicable rounding rules, the amounts for 2020 are as follows:

The limitation under §402(g)(1) on the exclusion for elective deferrals described in § 402(g)(3) is increased from $19,000 to $19,500.

The annual compensation limit under §§401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii) is increased from $280,000 to $285,000.

The dollar limitation under § 416(i)(1)(A)(i) concerning the definition of “key employee” in a top-heavy plan is increased from $180,000 to $185,000.

The dollar amount under § 409(o)(1)(C)(ii) for determining the maximum account balance in an employee stock ownership plan subject to a 5-year distribution period is increased from $1,130,000 to $1,150,000, while the dollar amount used to determine the lengthening of the 5-year distribution period is increased from $225,000 to $230,000.

The limitation used in the definition of “highly compensated employee” under § 414(q)(1)(B) is increased from $125,000 to $130,000.

The dollar limitation under § 414(v)(2)(B)(i) for catch-up contributions to an applicable employer plan other than a plan described in § 401(k)(11) or § 408(p) for individuals aged 50 or over is increased from $6,000 to $6,500. The dollar limitation under § 414(v)(2)(B)(ii) for catch-up contributions to an applicable employer plan described in § 401(k)(11) or § 408(p) for individuals aged 50 or over remains unchanged at $3,000.

The annual compensation limitation under § 401(a)(17) for eligible participants in certain governmental plans that, under the plan as in effect on July 1, 1993, allowed cost-of-living adjustments to the compensation limitation under the plan under §401(a)(17) to be taken into account, is increased from $415,000 to $425,000.

The compensation amount under § 408(k)(2)(C) regarding simplified employee pensions (SEPs) remains unchanged at $600.

The limitation under § 408(p)(2)(E) regarding SIMPLE retirement accounts is increased from $13,000 to $13,500.

The limitation on deferrals under § 457(e)(15) concerning deferred compensation plans of state and local governments and tax-exempt organizations is increased from $19,000 to $19,500.

The limitation under § 664(g)(7) concerning the qualified gratuitous transfer of qualified employer securities to an employee stock ownership plan remains unchanged at $50,000.

The compensation amount under § 1.61-21(f)(5)(i) of the Income Tax Regulations concerning the definition of “control employee” for fringe benefit valuation purposes is increased from $110,000 to $115,000. The compensation amount under § 1.61-21(f)(5)(iii) is increased from $225,000 to $230,000.

The dollar limitation on premiums paid with respect to a qualifying longevity annuity contract under § 1.401(a)(9)-6, A-17(b)(2)(i) of the Income Tax Regulations is increased from $130,000 to $135,000.1

The Code provides that the $1,000,000,000 threshold used to determine whether a multiemployer plan is a systemically important plan under § 432(e)(9)(H)(v)(III)(aa) is adjusted using the cost-of-living adjustment provided under § 432(e)(9)(H)(v)(III)(bb). After taking the applicable rounding rule into account, the threshold used to determine whether a multiemployer plan is a systemically important plan under § 432(e)(9)(H)(v)(III)(aa) is increased from $1,097,000,000 to $1,135,000,000.

The Code also provides that several retirement-related amounts are to be adjusted using the cost-of-living adjustment under § 1(f)(3). After taking the applicable rounding rules into account, the amounts for 2020 are as follows:

The adjusted gross income limitation under § 25B(b)(1)(A) for determining the retirement savings contributions credit for married taxpayers filing a joint return is increased from $38,500 to $39,000; the limitation under § 25B(b)(1)(B) is increased from $41,500 to $42,500; and the limitation under §§ 25B(b)(1)(C) and 25B(b)(1)(D) is increased from $64,000 to $65,000.

The adjusted gross income limitation under § 25B(b)(1)(A) for determining the retirement savings contributions credit for taxpayers filing as head of household is increased from $28,875 to $29,250; the limitation under § 25B(b)(1)(B) is increased from $31,125 to $31,875; and the limitation under §§ 25B(b)(1)(C) and 25B(b)(1)(D) is increased from $48,000 to $48,750.

The adjusted gross income limitation under § 25B(b)(1)(A) for determining the retirement savings contributions credit for all other taxpayers is increased from $19,250 to $19,500; the limitation under § 25B(b)(1)(B) is increased from $20,750 to $21,250; and the limitation under §§ 25B(b)(1)(C) and 25B(b)(1)(D) is increased from $32,000 to $32,500.

The deductible amount under § 219(b)(5)(A) for an individual making qualified retirement contributions remains unchanged at $6,000.

The applicable dollar amount under § 219(g)(3)(B)(i) for determining the deductible amount of an IRA contribution for taxpayers who are active participants filing a joint return or as a qualifying widow(er) is increased from $103,000 to $104,000. The applicable dollar amount under § 219(g)(3)(B)(ii) for all other taxpayers who are active participants (other than married taxpayers filing separate returns) is increased from $64,000 to $65,000. If an individual or the individual’s spouse is an active participant, the applicable dollar amount under § 219(g)(3)(B)(iii) for a married individual filing a separate return is not subject to an annual cost-of-living adjustment and remains $0. The applicable dollar amount under § 219(g)(7)(A) for a taxpayer who is not an active participant but whose spouse is an active participant is increased from $193,000 to $196,000.

Accordingly, under § 219(g)(2)(A), the deduction for taxpayers making contributions to a traditional IRA is phased out for single individuals and heads of household who are active participants in a qualified plan (or another retirement plan specified in § 219(g)(5)) and have adjusted gross incomes (as defined in § 219(g)(3)(A)) between $65,000 and $75,000, increased from between $64,000 and $74,000. For married couples filing jointly, if the spouse who makes the IRA contribution is an active participant, the income phase-out range is between $104,000 and $124,000, increased from between $103,000 and $123,000. For an IRA contributor who is not an active participant and is married to someone who is an active participant, the deduction is phased out if the couple’s income is between $196,000 and $206,000, increased from between $193,000 and $203,000. For a married individual filing a separate return who is an active participant, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

The adjusted gross income limitation under § 408A(c)(3)(B)(ii)(I) for determining the maximum Roth IRA contribution for married taxpayers filing a joint return or for taxpayers filing as a qualifying widow(er) is increased from $193,000 to $196,000. The adjusted gross income limitation under § 408A(c)(3)(B)(ii)(II) for all other taxpayers (other than married taxpayers filing separate returns) is increased from $122,000 to $124,000. The applicable dollar amount under § 408A(c)(3)(B)(ii)(III) for a married individual filing a separate return is not subject to an annual cost-of-living adjustment and remains $0.

Accordingly, under § 408A(c)(3)(A), the adjusted gross income phase-out range for taxpayers making contributions to a Roth IRA is $196,000 to $206,000 for married couples filing jointly, increased from $193,000 to $203,000. For singles and heads of household, the income phase-out range is $124,000 to $139,000, increased from $122,000 to $137,000. For a married individual filing a separate return, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

Drafting Information

The principal author of this notice is Tom Morgan of the Office of the Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes). However, other personnel from the IRS participated in the development of this guidance. For further information regarding this notice, contact Mr. Morgan at 202-317-6700 or John Heil at 443-853-5519 (not toll-free calls).

1 Notice 2017-64, 2017-45 I.R.B. 486, raised this limit from $125,000 to $130,000 although § 1.401(a)(9)-6, A-17(d)(2) provides for increases of the $125,000 limitation only in multiples of $10,000. Notice 2018-83, 2018-47 I.R.B. 774, indicated that this limit would remain at $130,000 until it would be adjusted to $135,000 pursuant to § 1.401(a)(9)-6, A-17(d)(2), and would be adjusted only in increments of $10,000 after that adjustment. Accordingly, future adjustments to this limit (which has been raised to $135,000 for 2020) will be made in increments of $10,000.

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. Any tax advice contained herein is of a general nature. You should seek specific advice from your tax professional before pursuing any idea contemplated herein.

Securities offered through Lion Street Financial, LLC (LSF) and Valmark Securities, Inc. (VSI), each a member of FINRA and SIPC. Investment advisory services offered through CapAcuity, LLC; Lion Street Advisors, LLC (LSF) and Valmark Advisers, Inc. (VAI), each an SEC registered investment advisor. Please refer to your investment advisory agreement and the Form ADV disclosures provided to you for more information. VAI/VSI, LSF and BDO Alliance USA are non-affiliated entities and separate entities from Fulcrum Partners and CapAcuity, LLC.