Companies have a little more flexibility in their matching limits for 2021, but most figures remain the same from the previous year. As a 401(k) plan administrator, Ubiquity keeps track of the annual changes to help advise small business owners and solopreneurs.
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Employer 401(k) contributions face the following rules, compared to the 2020 401(k) company match limits:
If you’re new to 401(k)s, you may wonder why the IRS changes the limits from year to year. The annual contribution limits adjust to inflation, usually in $500 or $1,000 amounts, based on the Consumer Price Index. Some years like 2020-2021, not much changes, so the numbers remain the same. One of the most stable amounts is the catchup contribution, which has remained the same at $6,500 since 2015.
If your plan allows for a matching contribution, you must follow a set formula and also comply with the maximum limit set by the Internal Revenue Service. This year, your matching formula may apply to up to $290,000 worth of employee income, +$5,000 over 2020.
For example: say your plan matches 50% on salary deferrals, not exceeding 5% of compensation. Employee “Bob” earns $360,000 this year, but your plan can only apply to up to $290,000 of his compensation.
Even though “Bob” may defer $19,500, only $14,500 (5% of $290,000) will be matched.
Under the terms of the plan, your matching contribution would also be $7,250 (50% x 5% x $290,000).
If you’re an entrepreneur, independent contractor, freelancer, or self-employed individual looking to save solely for your own benefit, a Solo 401(k) plan lets you contribute a maximum of $58,000–$1,000 more than 2020. If you’re over 50, you can add $6,500 for a grand total of $64,500.
As a small business 401(k) provider, it’s important to stay updated on the changes in limits for several reasons:
Update your HR, payroll managers, and employees of these new changes.
Prevent overpayment to avoid a hassle at audit time.
Saving as much as possible can translate to thousands of dollars over 20 years.
Make sure your formula remains competitive, given the new limits.
Ubiquity offers some of the most affordable small business 401(k) plans with a low, flat monthly rate. Unlike competitors, we never charge Assets Under Management or per-participant fees, and we never force you to work with a particular broker. We have everything from Traditional and Roth to Safe Harbor 401(k) plans. Contact us to learn more about starting a new plan or switching to a more affordable plan with top-level customer service.