Each year the IRS makes cost of living adjustments to many of the limits on contributions to, and benefits from, qualified and non-qualified retirement plans. As we approach the end of the first quarter of 2022, we thought it would be helpful to recap the new limits for the year. Note that all have been increased from the 2021 limits except for the catch-up contribution limit, which remains at $6,500.
401(k) and 403(b) Elective Deferrals
- A plan participant may defer up to $20,500 from their salary into a defined contribution retirement plan in 2022 (excluding catch-up contributions). Note that this amount includes both pre-tax and Roth contributions in aggregate, and it applies to all 401(k), 403(b), and SIMPLE IRA plans that an individual participates in for the year.
- If plan provisions allow it, an individual who is 50 or older in 2022 may make additional “catch-up” contributions of up to $6,500 over and above the $20,500 limit discussed above.
Defined Contribution Plan Limit
- 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 $61,000. This amount includes employer contributions, employee 401(k) contributions, and forfeitures.
Annual Compensation Limit
- The maximum amount of an employee’s annual compensation which may be used for contribution or benefit calculation purposes is $305,000.
Highly Compensated Employee (HCE) Threshold
- Employees are placed either into an HCE group or a non-HCE group for 401(k) plan nondiscrimination tests (i.e., ADP and ACP). An HCE is an employee who:
- Owns more than 5% of the employer at any time during the year or preceding year, or
- Earned more than $135,000 for 2022 from the employer and, if the employer elects, had compensation that ranked the employee in the top 20% of all employees.
Key Employee Threshold
- Key employee status is used to determine how employees are categorized for the top-heavy test, which measures whether plan assets are concentrated in the accounts of business owners or officers earning a certain amount of compensation. A plan is top-heavy if more than 60% of its assets are held in the accounts of key employees. The determination is made as of the last day of the preceding plan year. For 2022, the compensation paid to an officer that would cause him or her to be classified as a “key employee” is $200,000.
After reviewing the increases in the limits, plan sponsors should:
- Review the 2022 limits with your internal payroll staff or payroll service provider to make sure any necessary adjustments are made to incorporate the increased limits.
- Confirm that the correct definition of compensation from your plan document is being used to determine compensation for plan contributions.
- Identify your HCEs and key employees for 2021 and determine whether the increase in compensation thresholds will reduce the number of employees in these groups. If it does, your plan might be more likely to pass the nondiscrimination tests in 2022.
- If your plan fails any 2021 contribution limit or nondiscrimination tests, discuss potential correction options with your third-party administrator/service provider. Plan design changes may help your plan pass the necessary testing in the future.