IRS Announces 2020 Benefit Plan Limit Adjustments

Practical Law Legal Update w-022-7640 (Approx. 11 pages)

IRS Announces 2020 Benefit Plan Limit Adjustments

by Practical Law Employee Benefits & Executive Compensation

Retirement Plan Limits (Notice 2019-59)

Under Notice 2019-59, for the 2020 tax year:

The elective deferral limit under Section 402(g)(1) of the Internal Revenue Code (Code) (26 U.S.C. § 402(g)(1)) will increase from $19,000 to $19,500 for employees who participate in:
- Code Section 401(k) plans (see Practice Note, Contributions to a Defined Contribution Plan: Limits on Contributions);
- Code Section 403(b) plans (see Practice Note, Code Section 403(b) Plans: Overview); and
- most Code Section 457 plans (see Practice Note, Executive Compensation for Tax-Exempt Organizations).
The catch-up contribution limit for those age 50 and over under Code Section 414(v)(2)(B)(i) (26 U.S.C. § 414(v)(2)(B)(i)) will increase from will $6,000 to $6,500. The catch-up contribution limit for those age 50 and over under Code Section 414(v)(2)(B)(ii) (26 U.S.C. § 414(v)(2)(B)(ii)) will remain unchanged at $3,000 (see Practice Note, Contributions to a Defined Contribution Plan: Limits on Contributions).
The limitation on the annual benefit for a defined benefit (pension) plan under Code Section 415(b)(1)(A) (26 U.S.C. § 415(b)(1)(A)) will increase from $225,000 to $230,000.
The limitation on annual additions to a participant's defined contribution plan under Code Section 415(c)(1)(A) (26 U.S.C. § 415(c)(1)(A)) will increase from $56,000 to $57,000 (see Practice Note, Contributions to a Defined Contribution Plan: Limits on Contributions).
The annual compensation limit under Code Section 401(a)(17) (26 U.S.C. § 401(a)(17)) will increase from $280,000 to $285,000.
The limitation used in the definition of highly compensated employees (HCEs) under Code Section 414(q)(1)(B) (26 U.S.C. § 414(q)(1)(B)) will increase from $125,000 to $130,000 (see Standard Clause, Plan Language, Definition of Highly Compensated Employee).
The limitation used in the definition of a key employee in a top-heavy plan under Code Section 416(i)(1)(A)(i) (26 U.S.C. § 416(i)(1)(A)(i)) will increase from $180,000 to $185,000.
The dollar amount under Code Section 409(o)(1)(c)(ii) (26 U.S.C. § 409(o)(1)(c)(ii)) 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. The dollar amount used to determine the lengthening of the five-year distribution period will increase from $225,000 to $230,000. The limit under Code Section 664(g)(7) (26 U.S.C. § 664(g)(7)) concerning the qualified gratuitous transfer of qualified employer securities to an ESOP will remain unchanged at $50,000 (see Practice Notes, Employee Stock Ownership Plans (ESOPs) and Employee Stock Ownership Plans: Winding Down an ESOP).
The compensation amount under Code Section 408(k)(2)(C) (26 U.S.C. § 408(k)(2)(C)) regarding simplified employee pensions (SEPs) will remain unchanged at $600 (see Practice Note, Simplified Employee Pensions (SEPs) and Salary Reduction Simplified Employee Pensions (SARSEPs)).
The limitation under Code Section 408(p)(2)(E) (26 U.S.C. § 408(p)(2)(E)) regarding SIMPLE retirement accounts will increase from $13,000 to $13,500 (see Practice Note, Savings Incentive Match Plan for Employees Individual Retirement Accounts (SIMPLE IRAs): Employee Contribution to a SIMPLE IRA).

Notice 2019-59 provides that the threshold used to determine whether a multiemployer plan is a systemically important plan under Code Section 432(e)(9)(H)(v)(III)(aa) (26 U.S.C. § 432(e)(9)(H)(v)(III)(aa)) will increase from $1,097,000,000 to $1,135,000,000 (see Practice Note, Multiemployer Pension Plans).

Notice 2019-59 also discusses the increases in the adjusted gross income limitation under Code Section 25B(b)(1)(A) (26 U.S.C. § 25B(b)(1)(A)) for determining the retirement savings contribution credit.

For more information on dollar limits for retirement plans, see Practice Note, Requirements for Qualified Retirement Plans.

PBGC Premium Rates and Guarantee Limits

In October 2019, the PBGC announced updated PBGC premium rates for plan years beginning in 2020, which reflect the increases and indexing required by ERISA Section 4006 (29 U.S.C. § 1306), as amended by the Bipartisan Budget Act of 2015 (see Legal Update, Bipartisan Budget Act of 2015 Includes Pension Funding Provisions and Repeals Automatic Enrollment Under the ACA). Specifically:

The per-participant flat premium rate will increase from $80 to $83 for single-employer plans (as provided by the Bipartisan Budget Act of 2015) and will increase from $29 to $30 for multiemployer plans.
The variable-rate premium (VRP) for single-employer plans will increase from $43 to $45 per $1,000 of unfunded vested benefits (UVBs).
The VRP cap will increase from $541 to $561, multiplied by the number of participants. Multiemployer plans do not pay a VRP.

After 2019, all PBGC premium rates will be subject to indexing based on increases in the National Average Wage Index (NAWI). There are no scheduled premium increases other than indexing after 2019.

In October 2019, the PBGC also announced guarantee limits for single-employer defined benefit plans that fail in 2020. The guarantee limits for 2020 are 3.65% higher than the limits for 2019. A full list of PBGC maximum monthly guarantees for 2020 are included on the PBGC Maximum Monthly Guarantee Tables page. If a defined benefit plan fails in 2020 due to a plan sponsor's bankruptcy that began in an earlier year, the limits in effect for that earlier year apply.

Limits Related to Fringe Benefits and Other Code-Governed Health and Welfare Arrangements (Revenue Procedure 2019-44)

For 2020, the following limits will apply under Revenue Procedure 2019-44:

The dollar limit on employee salary reduction contributions to health flexible spending arrangements (health FSAs) is $2,750 (a $50 increase from 2019) (see Practice Note, Cafeteria Plans: Dollar Limit on Employee Salary Reduction Contributions to Health FSAs).
The maximum credit allowed for adoption of a child is $14,300 (an increase of $220 from 2019). The adoption credit begins to be phased out for individuals with modified adjusted gross incomes of more than $214,520 (for 2019, this amount is $211,160), and is completely phased out for individuals with modified adjusted gross incomes of $254,520 or more (for 2019, this amount is $251,160 or more). Both phase-out adjustments are an increase of $3,360 over their 2019 counterparts (see Practice Note, Fringe Benefits: Adoption Assistance Programs and Fringe Benefits Toolkit).
The maximum amount that can be excluded from an employee's gross income for the adoption of a child under an employer's adoption assistance program is $14,300 (an increase of $220 from 2019). The exclusion begins to be phased out for individuals with modified adjusted gross incomes of more than $214,520 (for 2019, this amount is $211,160), and is completely phased out for individuals with modified adjusted gross incomes of $254,520 or more (for 2019, this amount is $251,160 or more). Both phase-out adjustments are an increase of $3,360 over their 2019 counterparts (see Practice Note, Fringe Benefits: Adoption Assistance Programs).
The monthly limits for qualified transportation fringe benefits are as follows:
- the aggregate monthly limit for transit passes and transportation in a commuter highway vehicle is $270 (an increase of $5 from 2019); and
- the monthly limit an individual can exclude for qualified parking is $270 (an increase of $5 from 2019) (see Practice Note, Fringe Benefits Under Code Section 132: Transportation and Other Benefits: Qualified Transportation Benefits).
The total payment and reimbursement amounts for the year under a qualified small employer health reimbursement arrangement (QSEHRA) cannot exceed:
- $5,250 (increased from $5,150) (26 U.S.C. 9831(d)); or
- $10,600 for family coverage (increased from $10,450).
(See Practice Note, Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs): QSEHRA Statutory Dollar Limits.)
Regarding Archer medical savings accounts (Archer MSAs), a high-deductible health plan (HDHP) (self-only coverage) is a health plan with an annual deductible that is:
- not less than $2,350 (unchanged from 2019); and
- not more than $3,550 (increased from $3,500 for 2019).
Annual out-of-pocket expenses for covered benefits must not exceed $4,750 (increased from $4,650 for 2019) (see Practice Note, Defined Contribution Health Plans: Overview: Archer Medical Savings Accounts (Archer MSAs)).
Also, regarding Archer MSAs, an HDHP (family coverage) is a health plan with an annual deductible that is:
- not less than $4,750 (increased from $4,650 for 2019); and
- not more than $7,100 (increased from $7,000 for 2019).
Annual out-of-pocket expenses for covered benefits must not exceed $8,650 (increased from $8,550 for 2019).
Under the ACA's small business health care tax credit, the maximum credit is phased out based in part on an employer's average annual wages in excess of $27,600 for 2020 (an increase of $500 from 2019) (26 U.S.C. § 45R). The $27,600 amount also is used in calculating who is an eligible small employer for the credit (see Practice Note, Small Business Health Care Tax Credit Under the ACA).

HSA Limits for 2020

Earlier in the year, the IRS also issued 2020 inflation adjustments for HSAs and HDHPs (Rev. Proc. 2019-25 (May 28, 2019); see Practice Note, Defined Contribution Health Plans: Overview). Under this guidance, the annual HSA contribution limit for 2020 for an individual with:

Self-only HDHP coverage is $3,550 (an increase of $50 from 2019).
Family HDHP coverage is $7,100 (an increase of $100 from 2019).

For 2020, an HDHP is a health plan with:

An annual minimum deductible of:
- $1,400 for self-only HDHP coverage (an increase of $50 from 2019); and
- $2,800 for family HDHP coverage (an increase of $100 from 2019).
Annual out-of-pocket expenses (that is, deductibles, copayments, and other amounts, but excluding premiums) that are not more than:
- $6,900 for self-only HDHP coverage (an increase of $150 from 2019); and
- $13,800 for family HDHP coverage (an increase of $300 from 2019).

ACA Premium Tax Credit

The ACA provides for a refundable tax credit (known as the premium tax credit (PTC)) for eligible individuals and families who purchase health insurance through an ACA exchange (26 U.S.C. § 36B; see Practice Note, Affordable Care Act (ACA) Overview). Taxpayers who meet certain criteria may have some or all of their estimated PTC paid to the insurer in advance. However, if a taxpayer's advance credit payments are more than the actual PTC, the taxpayer owes the excess credit as a tax.

Under Revenue Procedure 2019-44, the following limits apply for tax years beginning in 2020:

If household income is less than 200% of the federal poverty line (FPL), the limits are:
- $325 for unmarried individuals (other than surviving spouses and heads of households) (an increase of $25 from 2019); and
- $650 for all other taxpayers (an increase of $50 from 2019).
If household income is at least 200%, but less than 300%, of the FPL, the limits are:
- $800 for unmarried individuals (other than surviving spouses and heads of household) (unchanged from 2019); and
- $1,600 for all other taxpayers (unchanged from 2019).
If household income is at least 300%, but less than 400%, of the FPL, the limits are:
- $1,350 for unmarried individuals (other than surviving spouses and heads of household) (a $25 increase from 2019); and
- $2,700 for all other taxpayers (a $50 increase from 2019).

ACA Information Reporting

In addition, Revenue Procedure 2019-44 increases the calendar year limits for penalties regarding:

Filing a correct information return, for returns required to be filed in 2021 (26 U.S.C. § 6721).
Furnishing a correct statement to individuals, for statements required to be furnished in 2021 (26 U.S.C. § 6722).

(See Practice Notes, ACA Information Reporting: Forms 1095-C and 1094-C (Overview): Penalties for Information Reporting Noncompliance and Information Reporting of Health Insurance Coverage by Large Employers (Section 6056).)

PCOR Dollar Amount

The final regulations implementing the ACA's patient-centered outcomes research (PCOR) fees applied for plan years and policy years ending on or after October 1, 2012, and before October 1, 2019. Accordingly, Revenue Procedure 2019-44 does not include PCOR fee adjustment for plan and policy years beginning after October 1, 2019 (see Practice Note, Patient-Centered Outcomes Research (PCOR) Fees Under the ACA).

Social Security Wage Base

On October 10, 2019, the Social Security Administration (SSA) announced that the Social Security taxable wage base for 2020 will increase to $137,700 from $132,900, in 2019.

IRS Announces 2020 Benefit Plan Limit Adjustments | Practical Law