IRS Makes Cost-of-Living Adjustments for 2021
This post has been updated as of March 25, 2021 to reflect changes made under the American Rescue Plan Act of 2021, as further described here.
The Internal Revenue Service (IRS) capped off a busy year with its annual cost-of-living adjustments applicable for 2021. A year-to-year comparison of limitations applicable to plan sponsors can be found here: 2021 Annual Limitations Chart.
Consistent with prior years, and reflecting general inflation, the IRS increased certain qualified retirement plan limitations. For example, the contribution limitation for defined contribution plans increased from $57,000 to $58,000 for 2021 (although the contribution limitation for defined benefit plans stayed stagnant). The annual compensation limit for purposes of Section 401(a)(17) of the Internal Revenue Code (IRC) increased from $285,000 to $290,000 (from $425,000 to $430,000 for certain governmental plans). The IRS did not, however, increase the amount of elective deferrals or catch-up contributions that can be made to defined contribution plans ($19,500 and $6,500, respectively).
The IRS also increased certain limits for health and welfare plan participants. The maximum annual contribution to a health saving account increase from $3,550 to $3,600 for an individual, and from $7,100 to $7,200 for a family. Small employers providing Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs) to their employees can offer increased reimbursements of up to $10,700 for family coverage, up from $10,600. (QSEHRA maximums for self-only coverage are increasing to $5,300, from $5,250.) Under the Consolidated Appropriations Act, 2021 (the “CAA”), signed into law on December 27, 2020, a cafeteria plan may provide that any unused amounts in a health care or dependent care flexible spending account can be carried over for the 2020 and 2021 plan years (see our post about the CAA, here). And under the American Rescue Plan Act of 2021 (the “ARPA”), signed into law on March 11, 2021, the annual dependent care flexible spending account maximum contribution increased for 2021 only from $5,000 to $10,500, and from $2,500 to $5,250 in the case of a separate return filed by a married individual (see our post about the ARPA, here). However, in 2021 the health flexible spending account maximum contribution stayed at its 2020 level, as did other benefits such as monthly pre-tax contributions for qualified transportation.
The Social Security wage base is increasing from $137,700 in 2020 to $142,800 in 2021 – a jump similar to the increase from 2019 to 2020.
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