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As we work our way into 2022, there are a couple items in the retirement plan space that you should be aware of, including updates to 401(K) plan contributions, annual compliance testing, and cash balance plans.
The annual contribution limits for 401K plans have increased for 2022. The new limit for deferrals (the amount you contribute out of your own paycheck) has increased to $20,500 from $19,500 last year. The annual “catch up” amount (the amount you can put away above the $20,500 if you are over the age 50) has remained the same at $6,500. This means anyone 50 years of age or older can put away $27,000 for 2022 into their retirement plan out of their own paychecks.
In addition, the defined contribution, or 415 limit, has increased to $61,000 from $58,000. This means that in addition to the extra $1,000 you can contribute to the plan yourself; the company can contribute up to an additional $40,500 for you. This limit does not include the “catch up” so that extra $6,500 doesn’t count toward the $61,000 total.
If you are interested in learning about options that may be able to help you reach the new 415 limit for your company, please contact us to discuss how this works.
This is also the time of year that the annual compliance testing starts. Each year, the IRS requires that 401(K) plans go through Nondiscrimination Testing (NDTs). NDTs are annual tests required to ensure that 401K retirement plans benefit all the employees (not just business owners or highly-paid employees).
The Actual Deferral Percentage (ADP) test looks at the difference in the contributions between the highly compensated employees and owners compared to the rest of the staff. The Actual Contribution Percentage (ACP) test compares the same groups but looks at company contributions such as the employer match. Top-Heavy testing assesses account balances of key employees as a percentage of the total plan assets. If the key employee group has more than 60% of the plan balance, the plan is deemed to be top-heavy, and an additional employer contribution may be required.
If you are having problems passing the ADP and ACP testing, or Top-Heavy testing, please contact us for help with the plan design of your retirement plan. There are many options that can help alleviate the need for these tests as well as increase your chances of passing them, so you and your highly compensated employees stop receiving refunds each year for excess deferrals.
If you are looking for more options, above and beyond the limits described above, we can also talk about adding a Cash Balance plan to your company. The cash balance plan is a hybrid defined benefit plan that provides owners and employees a company contribution toward their retirement. It operates like a pension plan; however, each participant can see their current balance and can move their money out of the cash balance plan into another qualified plan once they meet a distributable event (such as termination of work, age 59.5, etc.). This means they don’t necessarily have to wait until they retire to start drawing the money. You can learn more about cash balance plans by reading an article I wrote last year called “Installing a Cash Balance Plan for 2020 – There’s Still Time”.
If you’d like any assistance with understanding your retirement plan and seeing if it is performing the way you want it to, contact Joshua Rapp at [email protected] or visit the Retirement Services page of our website.
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