How much you and your employer can contribute toward your workplace retirement plan in 2020
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The Internal Revenue Service has increased the 401(k) company match limits for 2020, allowing employers to contribute even more toward their employees’ retirement savings. Employee elective deferrals and catch-up contributions have also gone up since 2019 to keep up with inflation.
Ubiquity, as a 401(k) provider and administrator, provides in-depth guidance to help employers adjust to these new changes and ensure they are still offering the most competitive plan possible.
Employee 401(k) contributions have changed in the following ways since last year:
If you’re new to 401(k)s, you may wonder why the IRS announced these changes. The annual contribution limits adjust with inflation – typically in $500 increments for employees and $1,000 for all sources.
Some years the consumer price index for urban wage earners and clerical workers does not vary enough to warrant an increase – in which case, the limits stay the same.
If you’ve had a 401(k) plan for years, you’ll note there were few surprises for 2020. The best news was the increase in catch-up contributions for those turning 50 in 2020. This amount has remained unchanged since 2015.
Employers must remain mindful of IRS changes for several reasons:
HR and payroll managers will need to adjust their systems with these new 2020 limits added. Plan sponsors who had their plans drawn up for the year prior to the change announcement will need to ensure their plans have benefit material addendums provided. Open enrollment materials will require updating, and employees will require notification before the year’s end.
HR professionals should encourage employees to save as much as they can. While not every employee will earn enough money to do so, the contribution cap is an excellent goal for deferring taxes and building a considerable nest egg for retirement. Over the course of 20 years, just 1% more saved each year can add up to thousands of dollars.
Whenever the IRS increases the threshold, it is a good idea for employers to take a look at their existing match formula and amount to ensure that it remains competitive. In 2020, employers were contributing an average amount of over 4% of a person’s pay into 401(k)s, with some contributing up to 6%.
Some employers choose a dollar-for-dollar match up to 3% or a 50-cents-on-the-dollar-up-to-6% match to encourage employees to save more from their own coffers.
Since many retirement programs are established to also help small business owners, highly-compensated executives, and key employees reach their maximum retirement savings limits, you may find a more generous plan is necessary to avoid failing the annual IRS nondiscrimination tests with a top-heavy plan. If you are worried about failing these tests, you can always ask Ubiquity about adding a Safe Harbor provision to your plan, which foregoes annual nondiscrimination testing in exchange for making generous matching contributions or nonelective deferrals based on one of three set formulas.
Some 401(k) plans do not automatically prevent taxpayers from contributing excess funds to their accounts. Also, employees who have multiple retirement savings plans may inadvertently exceed the limit. Employers should update their payroll systems with validation checks and an automatic stopping mechanism to prevent overpayment, as well as educate employees that the annual limit applies to all 401(k), 403b, and 457 plans put together.
Employees who have switched jobs this year can roll over a 401(k) with a former employer to the new employer’s 401(k). It’s fairly painless on the employee’s end. Ideally, the employee will arrange to have the transfer done automatically to avoid triggering taxes or penalties. Otherwise, the employee may have as little as 60 days to deposit the cashed-out 401(k) into the newer plan.
Employees should make sure the new 401(k) provider does not charge an Assets Under Management fee, which could increase the cost paid for administration a considerable amount. Here at Ubiquity, we do not charge AUM fees or per-participant charges – just one flat monthly rate that sponsors pay.
Dealing with overcontributions creates a considerable administrative headache, not to mention widespread employee unhappiness. If employees go above the annual contribution limit, the IRS requires notification by March 1, 2021, and excess deferrals refunded to plan participants by April 15.
Ubiquity remains one of the most affordable providers of small business 401(k) plans due to our low, flat monthly fee model of service. Unlike other providers, we never charge AUM or per-participant fees, and we never force you to work with a particular broker.
We are here to support you in providing a tremendous benefits plan to your workers and to answer any questions you may have, whether it’s when to start a small business 401(k) or how much it costs to manage a 401(k). Ubiquity takes a proactive approach to 401(k) administration and management, keeping your organization on top of annual changes as they occur so you and your employees can plan accordingly.
If you are a small business owner and need a retirement plan for yourself and your company, only Ubiquity offers flat-fee plans, plus expert guidance along the way.
We will fully customize your plan to meet the specific needs of your small business.
Setting up a 401(k) can be complicated. Only Ubiquity gives small business owners access to retirement experts in addition to industry-leading low flat-fees. Each sales expert has over a decade of experience assisting business owners in 401(k) plan design. Take advantage of this free benefit.