Many companies sponsor employees for their retirement plans. The Internal Revenue Service announces affecting dollar limitations for retirement plans each year. Please see the summary of the benefits and contribution limits for retirement plans for tax year 2020 below.
There are two main types of employer-sponsored retirement plans: defined-benefit plans and defined-contribution plans. A defined-benefit plan provides a specific retirement benefit amount when employees retire; while, under a defined-contribution plan, employees contribute a portion of their gross salaries to invest in the funds for retirement over time, and employer may choose to match the employee contributions.
For defined benefit plans, the benefit limits cannot exceed the lesser of $230,000 for the tax year, or the participant’s average compensation for his or her high-three years of service (HTS). The HTS calculation should include the three consecutive calendar years during which the highest aggregate compensation was received.
For defined contribution plans, a plan sponsor may contribute the lesser of $57,000 for 2020, or 100 percent of the employee’s compensation. These “annual additions” include employer contributions, employee contributions, and forfeitures. Employee’s contribution is limited to $19,500 per year plus $6,500 catch-up contribution, if his or her age is 50 or older. Moreover, payments made to restore plan losses from a breach of fiduciary duty under ERISA and other applicable federal and state laws are exempt from the limits on annual additions.
For multiemployer plans, all benefits and annual additions must satisfy the limits on an aggregate basis for all employers. All employers contributing to a multiemployer plan are treated as a single employer when applying the restriction on compensation paid after severance. The final regulations also provide rules regarding cost-of-living adjustments, aggregating plans, the disqualification of plans and trusts, and the definition of the limitation year for compliance purposes.