It's that time of year again. On November 6, 2019, the Internal Revenue Service (IRS) announced cost-of-living adjustments affecting dollar limitations for pension plans and other retirement-related items for the 2020 tax year. These limits include both employee and employer contribution limits.
Employers should review and update their qualified retirement plans, including their 401(k) plans and pension plans, and summary plan descriptions and other relevant employee communications, to ensure that their employees can maximize their contributions.
The list below includes details on the key limit increases effective January 1, 2020:
- The contribution limit for employees who participate in 401(k), 403(b), and most 457 plans will increase from $19,000 to $19,500.
- The dollar limit for catch-up contributions to an applicable employer plan for individuals age 50 and over will increase from $6,000 to $6,500.
- The limit on a participant's annual pension benefit under a defined benefit plan will increase from $225,000 to $230,000.
- The annual addition limit for defined contribution plans under Internal Revenue Code § 415(c)(1)(A) will increase from $56,000 to $57,000.
- The annual compensation limit (the maximum amount of compensation that can be taken into account for purposes of determining elective deferrals and other benefits) for qualified retirement plans will increase from $280,000 to $285,000.
- The dollar amount for determining the maximum account balance in an employee stock ownership plan (ESOP) subject to a five-year distribution period will increase from $1,130,000 to $1,150,000, while the dollar amount used to determine the lengthening of the five-year distribution period will increase from $225,000 to $230,000.
- The limit used in the definition of highly compensated employee will increase from $125,000 to $130,000.
- The dollar limit concerning the definition of key employee in a top-heavy plan will increase from $180,000 to $185,000.
The limit on annual contributions to an individual retirement account (IRA) will remain unchanged at $6,000. The additional catch-up contribution limit for individuals age 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000 for contributions to an IRA.
The complete list of changes can be found here.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.