IRS Announces 2021 Benefit Plan Limit Adjustments

Practical Law Legal Update w-028-0880 (Approx. 12 pages)

IRS Announces 2021 Benefit Plan Limit Adjustments

by Practical Law Employee Benefits & Executive Compensation

Retirement Plan Limits (Notice 2020-79)

Under Notice 2020-79, for the 2021 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 remain unchanged at $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 remain unchanged at $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 remain unchanged at $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 $57,000 to $58,000 (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 $285,000 to $290,000.
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 remain unchanged at $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 remain unchanged at $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 $1,150,000 to $1,165,000. The dollar amount used to determine the lengthening of the five-year distribution period will remain unchanged at $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 increase from $600 to $650 (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 remain unchanged at $13,500 (see Practice Note, Savings Incentive Match Plan for Employees Individual Retirement Accounts (SIMPLE IRAs): Employee Contribution to a SIMPLE IRA).

Notice 2020-79 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 $1,135,000,000 to $1,176,000,000 (see Practice Note, Multiemployer Pension Plans).

Notice 2020-79 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 2020, the PBGC updated the PBGC premium rates for plan years beginning in 2021, 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 $83 to $86 for single-employer plans (as provided by the Bipartisan Budget Act of 2015) and will increase from $30 to $31 for multiemployer plans.
The variable-rate premium (VRP) for single-employer plans will increase from $45 to $46 per $1,000 of unfunded vested benefits (UVBs).
The VRP cap will increase from $561 to $582, multiplied by the number of participants. Multiemployer plans do not pay a VRP.

All PBGC premium rates are 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 2020, the PBGC also published guarantee limits for single-employer defined benefit plans that fail in 2021. A full list of PBGC maximum monthly guarantees for 2021 are included on the PBGC Maximum Monthly Guarantee Tables page. If a defined benefit plan fails in 2021 due to a plan sponsor's bankruptcy that began in an earlier year, the limits in effect for that earlier year apply.

Limits for Fringe Benefits and Other Code-Governed Health and Welfare Arrangements (Revenue Procedure 2020-45)

For 2021, the following limits will apply under Revenue Procedure 2020-45:

The dollar limit on employee salary reduction contributions to health flexible spending arrangements (health FSAs) will remain at $2,750 (see Practice Note, Cafeteria Plans: Dollar Limit on Employee Salary Reduction Contributions to Health FSAs). For cafeteria plans that permit carryovers of unused amounts, the carryover limit will remain $550.
The maximum credit allowed for adoption of a child is $14,440 (a $140 increase from 2020). The adoption credit begins to be phased out for individuals with modified adjusted gross incomes (MAGI) of more than $216,660 (for 2020, this amount is $214,520), and is completely phased out for individuals with MAGI of $256,660 or more (for 2020, this amount is $254,520 or more). Both phase-out adjustments are an increase of $2,140 over their 2020 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 to adopt a child under an employer's adoption assistance program is $14,440 (a $140 increase from 2020). The exclusion begins to be phased out for individuals with MAGI of more than $216,660 (for 2020, this amount is $214,520), and is completely phased out for individuals with MAGI of $256,660 or more (for 2020, this amount is $254,520 or more). Both phase-out adjustments are an increase of $2,140 over their 2020 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 (unchanged from 2020); and
- the monthly limit an individual can exclude for qualified parking is $270 (unchanged from 2020) (see Practice Note, Fringe Benefits Under Code Section 132: Transportation Benefits: Overview of Qualified Transportation Fringe Benefits).
The total payment and reimbursement amounts for the year under a qualified small employer health reimbursement arrangement (QSEHRA) cannot exceed:
- $5,300 (increased from $5,250) (26 U.S.C. 9831(d)); or
- $10,700 for family coverage (increased from $10,600).
(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 $2,400 (increased from $2,350 for 2020); and
- not more than $3,600 (increased from $3,550 for 2020).
Annual out-of-pocket expenses for covered benefits must not exceed $4,800 (increased from $4,750 for 2020) (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 $4,800 (increased from $4,750 for 2020); and
- not more than $7,150 (increased from $7,100 for 2020).
Annual out-of-pocket expenses for covered benefits must not exceed $8,750 (increased from $8,650 for 2020).
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 $27,800 for 2021 (an increase of $200 from 2020) (26 U.S.C. § 45R). The $27,800 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).

ACA Affordability Percentage (Employer Mandate Penalties)

Earlier in the year, the IRS also issued the 2021 percentage for determining whether an individual is eligible for affordable employer-sponsored minimum essential coverage for ACA purposes (see Practice Note, Employer Mandate Under the ACA: Overview: Affordability Requirement and Safe Harbors). An employer is subject to employer mandate penalties (under Code Section 4980H(b)) unless it offers coverage that is affordable and provides minimum value (26 U.S.C. § 4980H(b)). For plan years beginning in 2021, an employer's coverage is affordable for an employee if the employee's required contribution is no more than 9.83% of the employee's household income (up from 9.78% for 2020) (Rev. Proc. 2020-36).

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). Individuals who meet certain criteria may have some or all of their estimated PTC paid to the insurer in advance. However, if an individual's advance credit payments are more than the actual PTC, the individual owes the excess credit as a tax.

The following limits apply for tax years beginning in 2021:

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) (unchanged from 2020); and
- $650 for all other taxpayers (unchanged from 2020).
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 2020); and
- $1,600 for all other taxpayers (unchanged from 2020).
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) (unchanged from 2020); and
- $2,700 for all other taxpayers (unchanged from 2020).

(Rev. Proc. 2020-45.)

ACA Information Reporting

Regarding ACA information reporting, the IRS announced increases to the calendar-year limits for penalties regarding:

Filing a correct information return, for returns required to be filed in 2022 (26 U.S.C. § 6721).
Furnishing a correct statement to individuals, for statements required to be furnished in 2022 (26 U.S.C. § 6722).

(Rev. Proc. 2020-45.)

For more information, see Practice Notes:

ACA PCOR Dollar Amount

Relatedly, the IRS announced last summer the applicable dollar amount for calculating patient-centered outcomes research (PCOR) fees for policy and plan years ending on or after October 1, 2019, and before October 1, 2020 (that is, $2.54) (Notice 2020-44; see Practice Note, Patient-Centered Outcomes Research (PCOR) Fees Under the ACA and Legal Update, IRS Announces Updated Fees and Procedures for PCOR Program, as Extended Under Year-End Funding Legislation).

HSA Limits for 2021

Earlier in the year, the IRS also issued 2021 inflation adjustments for health savings accounts (HSAs) and HDHPs (Rev. Proc. 2020-32 (May 20, 2020); see Practice Note, Defined Contribution Health Plans: Overview). Under this guidance, the annual HSA contribution limit for 2021 for an individual with:

Self-only HDHP coverage is $3,600 (an increase of $50 from 2020).
Family HDHP coverage is $7,200 (an increase of $100 from 2020).

For 2021, an HDHP is a health plan with:

An annual minimum deductible of:
- $1,400 for self-only HDHP coverage (unchanged from 2020); and
- $2,800 for family HDHP coverage (unchanged from 2020).
Annual out-of-pocket expenses (that is, deductibles, copayments, and other amounts, but excluding premiums) that are not more than:
- $7,000 for self-only HDHP coverage (an increase of $100 from 2020); and
- $14,000 for family HDHP coverage (an increase of $200 from 2020).

Excepted Benefit HRAs (EBHRAs)

Earlier this month, the IRS also announced the 2021 limit for amounts made newly available through excepted benefit HRAs (EBHRAs) (Rev. Proc. 2020-43 (Oct. 16, 2020); see Practice Note, Practice Note, Excepted Benefit Health Reimbursement Arrangements (EBHRAs)). Under implementing regulations, EBHRAs are an excepted benefit—and therefore need not satisfy certain otherwise-applicable group health plan requirements—if they satisfy several conditions (see Practice Note, Excepted Benefits). Under one of these conditions, amounts that are newly made available each plan year under an EBHRA may not exceed $1,800 (as adjusted for inflation) (see Practice Note, Excepted Benefit Health Reimbursement Arrangements (EBHRAs): Second Condition: Benefits Must Be Limited in Amount).

The 2021 inflation adjustment for EBHRAs is the initial $1,800 limit multiplied by a COLA that is the percentage (if any) by which the Chained Consumer Price Index for All Urban Consumers (C-CPI-U) for the prior calendar year is more than the C-CPI-U for 2019 (26 C.F.R. § 54.9831-1(c)(3)(viii)(B)).

Inflation adjustments to the C-CPI-U that are not a multiple of $50 are rounded down to the next lowest multiple of $50. Under this calculation, the maximum amount that may be made newly available for an EBHRA for plan years beginning in 2021 will remain $1,800.

The IRS indicated that it will publish the EBHRA newly available limit for 2022 plan years by June 1, 2021.

Social Security Wage Base

On October 13, 2020, the Social Security Administration (SSA) announced that the Social Security taxable wage base for 2021 will increase to $142,800 from $137,700, in 2020.

IRS Announces 2021 Benefit Plan Limit Adjustments | Practical Law