The Internal Revenue Service recently announced the cost-of-living adjustments (COLA) that will take effect January 1, 2022 (IRS Notice 2021-61). These COLAs affect various contribution and deduction limits for qualified retirement plans, as well as the deductible contribution limits for traditional Individual Retirement Arrangements (IRAs).
Section 415 of the Internal Revenue Code (“Code”) provides for dollar limitations on benefits and contributions under qualified retirement plans. Section 415(d) requires that the Secretary of the Treasury annually adjust these limits for cost-of-living increases. Other limitations applicable to deferred compensation plans are also affected by these adjustments under Section 415. Under Section 415(d), the adjustments are to be made under adjustment procedures similar to those used to adjust benefit amounts under Section 215(i)(2)(A) of the Social Security Act.
Increased Limits
- The limitation on the annual benefit under a defined benefit plan increases from $230,000 to $245,000 (415(b)(1)(A)).
- For a participant who separated from service before January 1, 2022, the participant’s limitation under a defined benefit plan is computed by multiplying the participant’s compensation limitation, as adjusted through 2021, by 1.0534 (415(b)(1)(B)).
- The limitation for defined contribution plans is increased in 2022 from $58,000 to $61,000 (415(c)(1)(A)).
- The annual deferral limit for 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan increases from $19,500 to $20,500 (Code Sections 402(g)(1),402(g)(3)).
- The annual compensation limit increases from $290,000 to $305,000 (401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii)).
- The dollar limitation concerning the definition of “key employee” in a top-heavy plan increases from $185,000 to $200,000 (416(i)(1)(A)(i)).
- The dollar amount for determining the maximum account balance in an employee stock ownership plan subject to a 5-year distribution period increases from $1,165,000 to $1,230,000, while the dollar amount used to determine the lengthening of the 5-year distribution period increases from $230,000 to $245,000 (409(o)(1)(C)(ii)).
- The limitation used in the definition of “highly compensated employee” increases from $130,000 to $135,000 (414(q)(1)(B)).
- The annual compensation limitation for eligible participants in certain governmental plans that, under the plan as in effect on July 1, 1993, allowed cost-of-living adjustments to the compensation limitation under the plan under Section 401(a)(17) to be taken into account, increases from $430,000 to $450,000 (401(a)(17)).
- The limitation regarding SIMPLE retirement accounts increases from $13,500 to $14,000 (408(p)(2)(E)).
- The limitation on te aggregate amount of length of service awards accruing with respect to any year of service for any bona fide volunteer, concerning deferred compensation plans of state and local governments and tax-exempt organizations increases from $6,000 to $6,500 (457(e)(11)(B)(ii)).
- The limitation on deferrals concerning deferred compensation plans of state and local governments and tax-exempt organizations increases from $19,500 to $20,500 (457(e)(15)).
- The limitation concerning the qualified gratuitous transfer of qualified employer securities to an employee stock ownership plan increases from $50,000 to $55,000 (664(g)(7)).
- The compensation amount under § 1.61-21(f)(5)(i) of the Income Tax Regulations (“Regulations”) concerning the definition of “control employee” for fringe benefit valuation purposes increases from $115,000 to $120,000. The compensation amount under § 1.61-21(f)(5)(iii) increases from $235,000 to $245,000 (1.61-21(f)(5)(iii)).
- The dollar limitation on premiums paid with respect to a qualifying longevity annuity contract under § 1.401(a)(9)-6, A-17(b)(2)(i) of the Regulations increases from $135,000 to $145,000.
Unchanged Limits
- The maximum amount that can be contributed to an IRA remains unchanged at $6,000 (Code Section 219(b)(5)(A)).
- The IRA catch-up contribution limit for IRAs remains unchanged at $1,000 (Code Section 219(b)(5)(A)).
- The dollar limitation for catch-up contributions to an applicable employer plan other than a plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over remains unchanged at $6,500 (414(v)(2)(B)(i)).
- The dollar limitation for catch-up contributions to an applicable employer plan described in Section 401(k)(11) or Section 408(p) for individuals aged 50 or over remains unchanged at $3,000 (414(v)(2)(B)(ii)).
- The compensation threshold for simplified employee pensions (SEPs) remains at $650 (Code Section 408(k)(2)(C)).
Quick reference guide to key limitations for 2021 and 2022
Item 2021 Limit 2022 Limit
401(k)/403(b)/457 $19,500 $20,500
Elective Deferral Limit
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Defined Contribution Plan $58,000 $61,000
Annual Limit
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Defined Benefit Plan $230,000 $245,000
Annual Limit
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Annual Compensation Limit $290,000 $305,000
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Catch-Up Contribution Limit $ 6,500 $ 6,500
401(k)/403(b)/457(b)/SEP
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Highly Compensated Employee $130,000 $135,000
Compensation Threshold
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Key Employee $185,000 $200,000
Compensation Threshold
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Social Security Taxable $142,800 $147,000
Wage Base
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