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Paley Rothman shares this library of resources with clients and friends of the firm to help them stay ahead of legal and business developments and trends. Here, you will find helpful tips and tools written by our attorneys. The information in the blogs and articles is not a substitute for legal advice and should not be relied on as such. Should you have any questions or want legal advice, please contact the attorney who wrote the blog or article.

Employee Benefits

Retirement Plan Contribution Limits for 2020

Each year the IRS makes cost of living adjustments to many of the limits on benefits from - and contributions to - qualified and non-qualified retirement plans. Here are the new limits for 2020:

  • The maximum annual contribution to an individual’s account in a defined contribution plan (a money-purchase, profit sharing and/or 401(k) plan) cannot exceed the lesser of 100% of the individual’s compensation or $57,000. That amount is $1,000 more than the 2019 limitation and it includes employer contributions, employee 401(k) contributions and forfeitures. If your defined contribution plan has a fiscal year other than the calendar year, this new limit is effective for plan limitation years ending in 2020. An individual who is 50 or older in 2020 and participates in a 401(k) plan can make an additional 401(k) “catch-up” contribution of up to $6,500 over and above the $57,000 amount. This “catch-up” limit is $500 more than the 2019 “catch-up” limit.
  • The maximum annual 401(k) contribution an individual can make is $19,500 ($500 more than the 2019 limit). An individual who is 50 or older in 2020 can make an additional “catch-up” 401(k) contribution of up to $6,500 ($500 more than the 2019 limit) over and above the $19,500 limit. These limitations include Roth 401(k) contributions; in other words, total 401(k) contributions are limited to $19,500 (plus the $6,500 catch-up amount if applicable) regardless of how much of the total comes from “pre-tax” 401(k) contributions and how much from Roth 401(k) contributions.
  • The maximum annual benefit which may be paid to an individual in a defined benefit plan is the lesser of 100% of the individual’s average compensation for the highest paid three consecutive years of his or her employment, or $230,000, which is $5,000 higher than the 2019 limitation. If your defined benefit plan has a fiscal year other than the calendar year, this limit is effective for plan limitation years ending in 2020.
  • The maximum amount of an employee’s annual compensation which may be taken into account for contribution or benefit calculation purposes is $285,000, effective for plan years beginning in 2020. This represents a $5,000 increase from the 2019 limitation. If your plan has a fiscal year other than the calendar year, this limit is effective for plan limitation years beginning in 2020.
  • For tax-exempt entities, the maximum amount which an individual may contribute to a 457(b) plan is $19,500 ($500 more than the 2019 limit). The “catch-up” contribution in a government-sponsored 457(b) plan for an individual who is age 50 or older in 2020 is up to $6,500 over above the $19,500 contribution limit. This “catch-up” limit is $500 more than the 2019 “catch-up” limit.
  • Special rules apply to “top heavy” plans. A defined contribution plan is top heavy if the aggregate account balances of key employees exceed 60% of the aggregate account balances of all plan participants. A defined benefit plan is top heavy if the present value of the accrued benefits of key employees exceeds 60% of the present value of the accrued benefits of all plan participants. For 2020, the compensation paid to an officer that would cause him or her to be classified as a “key employee” has increased from $180,000 to $185,000.
  • A retirement plan may not discriminate in favor of “highly compensated” employees. An employee is a highly compensated employee in 2020 if the employee either (1) owns greater than 5% of the ownership interests in the employer, or (2) earned over $130,000 in 2019 and, if applicable, is in the top 20% of employees when ranked by pay. For purposes of determining who will be a highly compensated employee in 2020, the dollar limitation has increased by $5,000.
  • The Social Security taxable wage base used in plans whose contribution formulas are integrated with Social Security (this is also referred to as permitted disparity) is increased in 2020 from $132,900 to $137,700, an increase of $4,800.

On a fairly regular basis, employers should review their plan’s design to ensure that the key employees are benefiting from the increased contributions, and that the plan is operating as a valuable recruitment and retention tool. You may want us to review your current retirement plan to make sure it maximizes the potential benefits and is consistent with the overall objectives of the organization.  We also stand ready to assist you with a review of your plan’s current investment platform and fees being charged to make sure your company has met all DOL (ERISA) requirements. 

Please feel free to contact us:
Paula A. Calimafde, Esq. - 301.951.9325 - calimafd@paleyrothman.com
Arnold B. Sherman, Esq. - 301.951.9377 - asherman@paleyrothman.com
Jessica B. Summers, Esq. - 301.968.3402 - jsummers@paleyrothman.com
Katherine M. Glenn, Paralegal - 301.951.9351- kglenn@paleyrothman.com


The table below sets forth the limitations for 2020 together with the 2019 and 2018 limitations:   

 

  2020 2019 2018
Social Security Taxable Wage Base for plans with contribution formulas that are integrated with Social Security (also known as “permitted disparity”)

$137,700

132,900

128,700

Maximum annual compensation of an individual that may be taken into account for contribution or benefit calculation purposes

$285,000

280,000

275,000

Maximum permitted annual 401(k) Contribution

$19,500

19,000

18,500

Maximum permitted annual 457(b) Contribution

$19,500

19,000

18,500

Limit on annual catch-up contributions to 401(k) plans

$6,500

6,000

6,000

Limit on annual catch-up contributions to governmental 457(b) plans

$6,500

6,000

6,000

Maximum annual contribution permitted to a defined contribution plan participant’s account

The lesser of 100% of the individual’s compensation or $57,000  

The lesser of 100% of the individual’s compensation or $56,000

The lesser of 100% of the individual’s compensation or $55,000

Maximum annual benefit payable to a defined benefit plan participant

The lesser of 100% of the individual’s average compensation for the highest paid three consecutive years of his employment or $230,000

The lesser of 100% of the individual’s average compensation for the highest paid three consecutive years of his employment or $225,000

The lesser of 100% of the individual’s average compensation for the highest paid three consecutive years of his employment or $220,000

Compensation paid to an officer that would cause him/her to be classified as a Key Employee for purposes of the top-heavy rules

$185,000

180,000

175,000

Definition of Highly Compensated Employee

Employee either (1) owns greater than 5% of the ownership interests in the employer, or (2) earned over $130,000 in 2019 and, if applicable, is in the top 20% of employees when ranked by pay

Employee either (1) owns greater than 5% of the ownership interests in the employer, or (2) earned over $125,000 in 2018 and, if applicable, is in the top 20% of employees when ranked by pay

 Employee either (1) owns greater than 5% of the ownership interests in the employer, or (2) earned over $120,000 in 2017 and, if applicable, is in the top 20% of employees when ranked by pay