As we bring in the new year, we should keep in mind a few changes with respect to the 2021 Compensation and Benefit limits.
401(k) Plan Limits
Employee 401(k) contributions for plan year 2021 will once again top off at $19,500 with an additional $6,500 “catch-up” contribution allowed for those turning age 50 or older. But maximum contributions from all sources (employer and employee combined) will rise by $1,000.
For employee contributions to 401(k)-type plans, the news is “no changes” for 2021, whereas last year saw a $500 jump in the overall employee contribution limit for 2020 plus a $500 rise in the catch-up limit. The annual defined contribution limit from all sources increases from $57,000 to $58,000 (plus the $6,000 catch-up if age 50 or older), or 100 percent of an employee’s compensation.
The annual ceiling on employee compensation that can be used to calculate employee deferral and employer matching contributions also is increasing to $290,000 from $285,000.
The limit used to define a highly compensated employee for nondiscrimination testing remains at $130,000, as well as the dollar limit for defining key employees in a top-heavy plan remains at $185,000.
Health Savings Account and High-Deductible Health Plan Limits
For 2021, the IRS announced an increase in health savings account (HSA) contribution limits. An individual with coverage under a qualifying high-deductible health plan (deductible not less than $1,400) can contribute up to $3,600 — up $50 from 2020 — for the year to their HSA. The maximum out-of-pocket has been capped at $7,000.
An individual with family coverage under a qualifying high-deductible health plan (deductible not less than $2,800) can contribute up to $7,200 — up $100 from 2020 — for the year. The maximum out-of-pocket has been capped at $14,000.
The $1,000 catch up contribution available to accountholders aged 55 and over is not tied to a cost of living adjustment and thus, remains at $1,000.
Social Security & Medicare Rates & Limits
President-elect Joe Biden, according to the tax plan he released before the election, may enact of number of policies that would raise taxes on individuals with income above $400,000, including raising individual income, capital gains, and payroll taxes. The details of Biden’s tax plan are still being finalized.
For earnings in 2021, the maximum taxable earnings limit is increasing to $142,800 from $137,700.
The OASDI tax rate for wages paid in 2021 is set by statute at 6.2 percent for employees and employers, each. Thus, an individual with wages equal to or larger than $142,800 would contribute $8,853.60 to the OASDI program in 2021, and his or her employer would contribute the same amount. The OASDI tax rate for self-employment income in 2021 is 12.4 percent.
For Medicare’s Hospital Insurance (HI) program, the tax rates are 1.45 percent for employees and employers, each, and 2.90 percent for self-employed persons.
For a summary of these changes, please refer to the table below.
Nancy Ellington is a Managing Partner with Alliance Compensation LLC, a team of seasoned experts and trusted solution for clients across the Western US in public and private companies. She has over 30 years of experience in corporate leadership roles and consulting, and lives with her husband and two kids in Redmond, WA.