401(k) Contribution Limits Jump for 2022
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.
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