Qualified Plans--The "Big Jump"

Consumer Price Index, inflation, and a strong recovery of the economy have caused the Internal Revenue Service (IRS), Social Security Administration (SSA), and Pension Guaranty Benefit Corporation (PGBC) to make significant changes to the qualified retirement plan limits. Come January 1, 2022, the plan limits will rise significantly.

In past years, plan limits increased in small single-step increments like $500, $1,000, or $5,000. This year's change, some limits will rise by as much as 3x the norm. Per the IRS Notice 2021-61 here are a few major highlights to the plan limitation changes:

• The maximum annual addition to Defined Contribution Plans increased from $58,000 to $61,000

• The maximum annual benefit under the Defined Benefit Plans increased from $230,000 to $245,000

• Annual compensation limit increased from $290,000 to $305,000

• The elective deferral limit (CODA) increased from $19,500 to $20,500

• Highly Compensated Employee is defined as $135,000 or more (from $130,000)

• Key Employee is defined as $200,000 (up from $185,000)

• The maximum earnings subject to Social Security Tax increased from $142,800 to $147,000

• PBGC premium rates increased $2/plan participant

Overall, the changes seem to benefit both the employees (more they can contribute, benefit, and tax-defer for retirement) and employers (more tax deductions and potentially less Highly Compensated Employees (HCE) and Key employees) in most cases. However, it will be interesting to see how these changes can potentially restructure company plan documents and types of plans to benefit HCE and owners/sponsors.