The IRS has announced the 2022 maximum contribution limits for 401(k) plans. Individual employee contributions are capped at $20,500 per year, up from $19,500 for 2021. The $6,500 maximum allowable "catch-up" contribution for those aged 50 or older will stay the same as in 2021. Additionally, the maximum combined employee and employer contribution per employee is increasing to $61,000 from $58,000 for 2021 ($65,000 more for workers making catch-up contributions). In other words, employers can now contribute up to $40,500 in profit-sharing and matching contributions to an employee's 401(k) plan.
The changes come as a result of an increase in the overall annual benefit under a defined benefit plan under IRC Section 415(b)(1)(A) from $230,000 to $245,000, and from a change in the annual compensation limit under Sections 401(a)(17), 404(l), 408(k)(3)(C) and 408(k)(6)(D)(ii), from $290,000 to $305,000 in 2022. Using these figures, employers can now calculate contributions based on a higher amount of annual compensation. The net result is that annual limits for employer-provided contributions to 401(k)-type defined contribution plans have increased nearly 5.2%. Employers can contribute the additional $3,000 even if plan participants are contributing the maximum allowable for employees. Highly compensated employees The IRS has a different contribution maximum for highly compensated or key employees (HCEs). The agency increased the salary benchmark under IRC Section 416(i)(1)(A)(i) concerning the definition of key employee in a top-heavy plan to $135,000 for 2022, up from $130,000 in 2021. The other way to qualify as a key employee is if they own 5% or more of the company. Average contributions made by HCEs cannot be more than 2 percentage points higher than those made by non-highly compensated employees. So, if the average contribution non-HCEs make equals 4% of their salaries, the average contribution they make can't exceed 6% of their salaries. Other workplace retirement plans The maximum contribution limit for SIMPLE IRAs or SIMPLE 401(k)s (savings incentive match plans for employees of small employers) will increase to $14,000 in 2022, from $13,500 for 2021. Simplified Employee Pension-IRA contribution limits will rise to $61,000 per year for 2022, up from $58,000 per year in 2021. SEP-IRAs are a good fit for a small business owner with few to no employees, or for the self-employed. A sole proprietor can shelter 20% of net business profit, up to a total contribution of $57,000 for 2020 and $58,000 for 2021. If you have employees, you'll have to contribute an equal percentage of income into their account as you did into your own. The amount placed into a SEP-IRA is 100% tax-deductible. Increase in defined benefit plan amount If your company offers a defined benefit plan, the maximum annual benefit from a qualified plan is increased from $230,000 to $245,000 in 2022. Comments are closed.
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September 2022
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In February 2020, The Friedman Group joined AssuredPartners, the 11th largest insurance brokerage in the U.S. This partnership provides us access to additional capital and a national footprint that enables us to continue to negotiate the most favorable coverage terms and conditions for our clients, and allows us to provide an even broader spectrum of risk management support services.
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