United States: Most Key Dollar Limits For Benefits And Executive Compensation To Change For 2022

On November 4, 2021, the Internal Revenue Service announced its 2022 cost-of-living adjustments to various employee benefit plan dollar limits. While these limits directly affect tax-qualified retirement plans, certain dollar limits and thresholds imposed outside of the tax-qualified retirement plan context, such as nonqualified deferred compensation subject to Section 409A of the Internal Revenue Code of 1986, as amended (the "Code"), also are affected. Although certain limits will remain the same for 2022, many of the limits affecting employer-provided plans will increase.

Attached to this alert is a table comparing the 2022 dollar limits and thresholds that are most relevant to retirement and deferred compensation plans to those in 2021 and 2020. The most noteworthy are the following:

• The elective deferral (contribution) limit for employees who participate in 401(k) plans (other than SIMPLE plans) is increased from $19,500 to $20,500. The catch-up contribution limit for those aged 50 and over remains unchanged at $6,500.
• The limit on annual benefits under a defined benefit plan is increased from $230,000 to $245,000. This limit may also affect nonqualified deferred compensation plans that provide defined benefits in excess of a tax-qualified defined benefit plan.
• The annual allocation limit for defined contribution plans is increased from $58,000 to $61,000.
• The maximum amount of annual compensation that can be taken into account under a qualified retirement plan is increased from $290,000 to $305,000. This limit may also affect nonqualified deferred compensation plans that provide benefits in excess of this annual dollar limit. In addition, under the above limit, the amount of severance pay that can be exempt from Code Section 409A under a "safe harbor" separation pay arrangement (e.g., a severance arrangement that pays severance pay only upon an involuntary separation from service, also referred to as the "two-times exception"1 ) is increased from $580,000 to $610,000.
• The dollar limit used in the definition of "highly compensated employee" is increased from $130,000 to $135,000.
• The dollar limit relating to the definition of "key employee" in a top-heavy plan is increased from $185,000 to $200,000.

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