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2021 inflation-adjusted limits for retirement and employee benefit plans announced

Benefits Administration and Outsourcing|Health and Benefits|Retirement|Total Rewards
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By Cindy Brockhausen , Gary Chase and Anu Gogna | November 17, 2020

These limits potentially affect the design, administration, communication and tax reporting for retirement and benefit-related plans.

On October 26, the IRS released Revenue Procedure 2020-45, which contains the 2021 tax year inflation adjustments for a number of income tax benefit-related provisions, including health flexible spending arrangements, qualified transportation fringe benefits, qualified adoption assistance programs and eligible long-term care premiums. It also includes the indexed dollar amounts for the federal income tax-related standard deduction and tax rate tables.

That same day, the IRS also released Notice 2020-79, which contains the qualified retirement plan limits for 2021. These limits restrict the contributions that can be made to, and benefits that can be paid from, qualified retirement plans as well as the compensation that can be used when determining benefits.

On October 13, the Social Security Administration announced that the maximum taxable wage base on annual wages subject to Social Security taxes will increase to $142,800 in 2021 (up from $137,700 in 2020); in Revenue Procedure 2020-32 — released earlier this year — the IRS provided the inflation-adjusted limits relevant to health savings accounts (HSAs).

The table below includes select limits for 2021 and compares them with the 2020 limits. These limits potentially impact the design, administration, communication and tax reporting for retirement and benefit-related plans.

Inflation-adjusted limits for health, retirement and other benefit plans, 2021 vs. 2020
Limit 2020 2021
Health flexible spending arrangements (FSAs) (general and limited purpose)

Maximum annual health FSA salary reduction contribution $2,750 $2,750
Maximum annual health FSA carryover of unused amounts from the prior plan year for plans that permit carryover $500 $550
Qualified transportation fringe benefits

Monthly limitation amounts
- Transit pass and commuter highway vehicle (combined) $270 $270
- Qualified parking $270 $270
Qualified adoption assistance

Maximum per adoption income tax exclusion
- Child with special needs (regardless of actual expenses) $14,300 $14,440
- Other adoptions $14,300 $14,440
Adjusted gross income (AGI) tax exclusion phaseout
- Phaseout begins $214,520 $216,660
- Phaseout complete $254,520 $256,660
Dependent care assistance (including FSAs)1

Maximum annual dependent care assistance benefit
- Individual or a married couple filing jointly $5,000 $5,000
- Married individual filing separately $2,500 $2,500
Qualified retirement plan limits

Maximum recognizable compensation $285,000 $290,000
Highly compensated employee (HCE) $130,000 $130,000
Section 415 benefit limits
- Defined benefit plans $230,000 $230,000
- Defined contribution plans $57,000 $58,000
Limit on pre-tax elective deferrals
- Under age 50 $19,500 $19,500
- Age 50 and over $26,000 $26,000
Qualifying longevity annuity contract (QLAC)

Investment limit $135,000 $135,000
Social Security taxable wage base

Taxable wage base $137,700 $142,800
Eligible long-term care (LTC) premiums

Annual limitation on LTC premiums includible as medical care
Age before close of tax year
- Up to 40 $430 $450
- 41 to 50 $810 $850
- 51 to 60 $1,630 $1,690
- 61 to 70 $4,350 $4,520
- Over 70 $5,430 $5,640
Standard deduction

Filing status
- Married individuals filing jointly $24,800 $25,100
- Heads of households $18,650 $18,800
- Unmarried individuals $12,400 $12,550
- Married individuals filing separately $12,400 $12,550
Health savings accounts (HSAs)

Individual coverage
- Maximum annual HSA contribution $3,550 $3,600
- Minimum annual deductible for high-deductible health plan (HDHP) $1,400 $1,400
- Maximum annual out-of-pocket expenses for HDHP $6,900 $7,000
Family coverage
- Maximum annual HSA contribution $7,100 $7,200
- Minimum annual deductible for HDHP $2,800 $2,800
- Maximum annual out-of-pocket expenses for HDHP $13,800 $14,000
Catch-up contributions2
(for individuals attaining age 55 by December 31 until enrolled in Medicare)
$1,000 $1,000

Footnotes

1 The dependent care assistance limits under Internal Revenue Code section 129 are not adjusted for inflation; these benefit limits can only be adjusted by a legislative amendment to section 129.

2 The HSA catch-up contribution amount for participants attaining age 55 by December 31 of the tax year is not adjusted for inflation; any change would require statutory amendment.

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