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For 2022, 401(k) Contribution Limit Rises to $20,500

Reaching the 401(k) contribution ceiling can be a long-term savings goal

November 4, 2021 | Stephen Miller, CEBS

A stack of coins with the word 2020 on top of them.

Employee 401(k) contributions for 2022 will top off at $20,500—a $1,000 increase from the $19,500 cap for 2021 and 2020—the IRS announced on Nov. 4. Plan participants age 50 or older next year can contribute an additional $6,500, unchanged from 2021.

The annual employee contribution limit "usually goes up by $500 at a time but higher inflation is making it go two steps in one year," commented Harry Sit, CEBS, who edits The Finance Buff blog. Retirement plan contribution limits are adjusted for inflation, and "inflation has been at elevated levels in recent months," he noted.

The limit on total employer-plus-employee contributions to defined contribution plans will increase to $61,000 in 2022, up by $3,000 from $58,000 in 2021. "This limit usually increases by $1,000 at a time but now it’s jumping three steps in one year," Sit said.

Most defined contribution and defined benefit plan limits will be adjusted upward, the IRS announced in Notice 2021-61, with annual cost of living adjustments (COLAs) for employer-sponsored retirement plans and for individual retirement accounts IRAs).

401(k) Contributions

While most contribution and income limits will go up in 2022, "some limits will stay the same as in 2021 due to rounding," Sit said.

Defined Contribution Plans	2022	2021	Change
Maximum employee elective deferral (age 49 or younger) ¹	$20,500	$19,500	+$1,000
Employee catch-up contribution (age 50 or older by year-end) ²	$6,500	$6,500	no change
Maximum employee elective deferral plus catch-up contribution (age 50 or older)	$27,000	$26,000	+$1,000
Defined contribution maximum limit, employee + employer (age 49 or younger) ³	$61,000	$58,000	+$3,000
Defined contribution maximum limit (age 50 or older), all sources + catch-up	$67,500	$64,500	+$3,000
Employee compensation limit for calculating contributions	$305,000	$290,000	+$15,000
Key employees' compensation threshold for top-heavy plan testing ⁴	$200,000	$185,000	+$15,000
Highly compensated employees’ threshold for nondiscrimination testing ⁵	$135,000	$130,000	+$5,000

¹ The $20,500 elective deferral limit is also known as the 402(g) limit, after the relevant tax code section. Participants' annual contributions may not exceed 100% of their compensation.

² The $6,500 catch-up contribution limit for participants age 50 or older applies from the start of the year for those turning 50 at any time during the year.

³ Total contributions from all sources may not exceed 100% of a participant's compensation.

⁴ Includes officers of the company sponsoring the plan.

⁵ For the 2022 plan year, an employee who earned more than $135,000 in 2021 is an HCE.
Source: IRS Notice 2021-61.

Although these limits were announced as many employers were beginning their open enrollment periods for 2022 benefits, "fortunately, 401(k) contributions can be adjusted during the course of the year and so are less time-sensitive" compared with benefit caps that employees are locked into after their annual enrollment selection, said Kim Buckey, vice president of client services at DirectPath, a benefits advocacy and education firm.

Annual Limit as a Contribution Goal

HR professionals should still convey to employees their plan contribution limits for next year. Not all plan participants will be able to fund their 401(k) accounts up to the maximum, of course, but the contribution cap is a goal they should keep in mind and may encourage those who can defer extra dollars for retirement savings to do so.

According to Fidelity Investments, employees' average 401(k) contribution rate reached a record 9.3 percent in the second quarter of 2021. Over the last year, more than one in three (38 percent) of 401(k) savers have increased their savings rate.

With the annual increase in the employee contribution limit, a good message for plan participants is that "increasing your contribution rate, even by 1 percent, can make a big difference in your long-term retirement savings," said Kevin Barry, president of workplace investing at Fidelity. "What may seem like a small amount today can have a significant impact on your account balance in 10 or 20 years."

Those who have not been contributing enough per paycheck to reach the annual cap and who can afford to do so can increase their contributions before the end of the year so that they reach the full annual limit.

Conversely, participants may want to ensure that they don't hit the annual limit prior to year-end, which could mean losing out on employer matching contributions tied to per-paycheck deferrals, unless the plan sponsor has agreed to "make whole" or "true up" participants who max out their annual contributions prior to their final paycheck.

401(k) accounts could fund retirements closer to the level of traditional pensions plans if participants contributed more, according to Sit. "It takes about 15-20 percent of your pay to get to the level a typical pension plan once paid," he noted. For employees to achieve the same level of retirement income, they will need to target their contributions at that level, counting their employer match, he advised.

COMPLYING WITH CONTRIBUTION LIMITS

IRS records show that the vast majority of employees comply with annual limits on the amount of compensation that they can contribute to their 401(k) plans, according to a 2018 report by the Treasury Inspector General for Tax Administration. Nonetheless, the inspector general identified two areas in which compliance could be improved:

Some 401(k) plans did not prevent taxpayers from exceeding the annual limit.

Some employees exceed annual limits when contributing to multiple 401(k) plans.

The findings suggest that employers ensure that their payroll systems don't accept participant contributions that exceed the annual dollar limit, and that employers educate plan participants who may be holding more than one job that the annual limit applies to total contributions to all 401(k) plans.

401(k) After-Tax Contributions

A Roth 401(k) is funded with after-tax dollars and withdrawals are tax-free during retirement, while a traditional 401(k) is funded with pretax dollars and withdrawals are taxed as income during retirement.

Many plans allow participants to convert dollars in a traditional 401(k) account to the plan's Roth account, although the participant must then pay income taxes on all dollars (pretax contributions and earnings) being converted. When withdrawn from the Roth account during retirement, no taxes are subsequently owed.

Some plans, however, will also allow employees to make additional after-tax—but non-Roth—contributions to a traditional 401(k) once the 2022 participant contribution limit of $20,500 (or $27,000 after age 50) is exceeded, up to the "all sources" employer-plus-employee contribution limit of $61,000 (or $67,500 after age 50).

If the plan document allows after-tax contributions to a traditional 401(k), then by following the correct steps employees can convert these contributions to Roth dollars within the plan, or to a Roth individual retirement account (IRA), so that the after-tax traditional 401(k) contributions become, effectively, Roth contributions. At the time of the conversion, only earnings are taxed as income, while the dollar amount of the after-tax plan contributions will covert tax free.

[SHRM members-only Toolkit: Designing and Administering Defined Contribution Retirement Plans]

Defined Benefit Plan Limits

Sponsors of defined benefit pension plans should note that the IRS announced the following COLAs under tax code Section 415, also taking effect on Jan. 1:

Annual benefit limit. The maximum annual benefit that may be provided through a defined benefit plan is increased to $245,000 from $230,000.

Separation from service. For a participant who separated from service before Jan. 1, 2022, the annual benefit limit for defined benefit plans is computed by multiplying the participant's compensation limit, as adjusted through 2021, by 1.0534. This is an increase from the previous year, when the participant's compensation limit, as adjusted through 2020, was multiplied by 1.0122.

Separately, the federal Pension Benefit Guaranty Corp., which insures private-sector defined benefit pension plans, posted 2022 premium rates for single-employer and multiemployer pension plans.

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Other Employer Plans

IRS Notice 2021-61 also provided adjusted limits and thresholds for other workplace retirement plans:

For SIMPLE (savings incentive match plan for employees of small employers) retirement accounts, the maximum contribution limit is increased to $14,000 from $13,500. The SIMPLE plan catch-up contribution limit remains $3,000.

For simplified employee pensions (SEPs), the minimum compensation threshold remains unchanged at $650. The SEP maximum compensation limit rises to $305,000 from $290,000.

Contributing to Multiple Plans

401(k) plans offered by private employers and 403(b) plans, designed for tax-exempt and nonprofit organizations such as schools, hospitals and religious groups, meet specifications laid out in Section 401(a) of the U.S. tax code and are therefore known as tax-qualified plans. Both plan types share the same tax advantages, contribution limits, Roth options and early withdrawal penalties, although some of the rules regarding plan administration and compliance with the Employee Retirement Income Security Act (ERISA) differ.

But 457 plans, offered by state and local public employers and some nonprofit employers, are considered nonqualified retirement plans and are not governed by ERISA. In addition, 457 plans differ from 401(k) and 403(b) plans with regard to catch-up contributions, early withdrawals and hardship distributions.

If an employee has both a 401(k) and 403(b) retirement plan, whether from the same or different employers, their combined contributions to both plans together are capped at $20,500 for 2022 plus the $6,500 catch-up contribution for participants who are age 50 or older, while employer-plus-employee contributions top off at $61,000 for both plans combined, plus the catch-up amount.

However, the IRS allows participants who contribute to a 401(k) and a 457 plan at the same time to contribute the maximum amount to both plans separately, and the same holds for employer-plus-employee limits. Likewise, participants with a 403(b) plan and a 457 plan can contribute to each separately up to each plan's annual limit.

IRAs

The limit on annual contributions to an IRA remains unchanged at $6,000. The additional catch-up contribution limit to an IRA for individuals age 50 and over remains $1,000 (not indexed for inflation).

Although personal IRAs are not employer plans, the amount that account holders can contribute annually is affected by whether they have a workplace retirement plan and how much they earn.

The income ranges for determining eligibility to make deductible contributions to traditional IRAs, and eligibility to contribute to Roth IRAs, increased for 2022 as shown below.

TRADITIONAL IRA DEDUCTION PHASE OUT:

Taxpayers can deduct contributions to a traditional IRA if they meet certain conditions. If during the year either they or their spouse was covered by a retirement plan at work, the deduction may be phased out until it is eliminated, depending on filing status and adjusted gross income (AGI):

For single people covered by a workplace retirement plan, the IRA phase-out range is $68,000 to $78,000, up from $66,000 to $76,000.

For married couples filing jointly, where the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range is $109,000 to $129,000, up from $105,000 to $125,000.

For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple's income is between $204,000 and $214,000, up from $198,000 and $208,000.

For married individuals filing a separate return who are covered by a workplace retirement plan, if they lived with their spouse at any time during the year, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

ROTH IRA INCOME PHASE OUT:

The 2022 AGI phase-out range for taxpayers contributing to a Roth IRA are:

For singles and heads of household, the income phase-out range is $129,000 to $144,000, up from $125,000 to $140,000.

For married couples filing jointly, the income phase-out range is $204,000 to $214,000, up from $198,000 to $208,000.

For married individuals filing a separate return, if they lived with their spouse at any time during the year, the phase-out range is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.

Saver's Credit

The 2022 income limit for the Saver's Credit (also known as the Retirement Savings Contributions Credit) for low- and moderate-income workers is increased to: