The IRS has released its 2020 contribution limits for employees and employers and their retirement plans. These changes are annual cost-of-living adjustments and impact several types of retirement plans.
Contribution limits for 2020
With the new 2020 contribution limits, employees can contribute up to $19,500 if they participate in defined contribution plans, which include traditional 401(k), safe harbor 401(k), safe harbor with qualified automatic contribution agreement (QACA), cross-tested, and 403(b) plans. This is a $500 increase from the 2019 employee contribution limit ($19,000).
Employees who are 50 years old or older can also make catch-up contributions in addition to their annual contributions. For defined contribution plans, catch-up contributions are limited to $6,500 for 2020.
For example, Sharon is 59 years old. She’s a participant in her employer’s traditional 401(k) plan. She can contribute a maximum total of $26,000 to her 401(k) plan in 2020.
Total annual contribution limit
The IRS also increased the annual additions contribution limit for 2020 which includes both employee and employer contributions.
For defined contribution plans and Simplified Employee Pension (SEP) IRA plans, the total annual contribution limit is $57,000 per participant in 2020. This is a $1,000 increase from the 2019 contribution limit of $56,000. Cross-tested plans are also subject to this contribution limit. Annual additions paid to a plan participant’s account can’t be more than 100% of the participant’s compensation or $57,000 ($63,500 if they make catch-up contributions).
If employees participate in SIMPLE-IRA plans, they can contribute up to $13,500 in 2020. However, their catch-up contributions remain at $3,000.
If you offer a plan where your employer contributions are based on employee compensation, the maximum compensation amount you can use to calculate your contribution is $285,000 for 2020.
Let’s say you offer a safe harbor 401(k) plan and choose to allocate a 3% nonelective contribution to employees’ 401(k) accounts. If an employee earns $300,000 in 2020, you’d limit your 3% nonelective contribution to $285,000 of their compensation. So, you would contribute $8,550 to that employee’s plan in 2020.
Here is a chart on how eight common types of retirement plans compare to each other, including employer and employee contribution limits, vesting, employee eligibility, and plan document requirements.
Annual additions contribution – an overall limit on contributions to a participant’s plan account which includes the total of all employer contributions, employee elective deferrals (but not catch-up contributions), employee contributions, employer matching, discretionary contributions, and any forfeiture allocations.
Catch-up contributions – contributions made by individuals who are age 50 or older. They must make contributions by the end of the plan year.
Have questions about 2020 retirement plan contributions? Let’s talk!