On November 4th, 2021, the Internal Revenue Service (IRS) announced cost-of-living adjustments (COLA) for 2022 benefit and contribution limits. Specifically, employee contribution limits increase for 401(k), 403(b), and most 457 plans. In addition, the federal government’s Thrift Savings Plan increases from $19,500 to $20,500. Furthermore, the IRS issued technical guidance regarding 2022 COLA increases to dollar limitations for pension plans and other retirement-related items. The increases will take effect on January 1st, 2022. Earlier, the Employee Benefits Security Administration (EBSA) released a new prohibited transaction rules policy.
Background of COLA and Benefit and Contribution Limits
Congress enacted the COLA provision as part of the 1972 Social Security Amendments. Generally, COLA ensures that the purchasing power of Social Security and Supplemental Security Income (SSI) benefits keeps matches inflation. Related adjustments occur if there is an increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) from the third quarter of the last year to the third quarter of the current year. Meanwhile, Section 415(d) of the Internal Revenue Code requires the Secretary of the Treasury to make annual adjustments to benefit and contribution limits based on COLA.
Overview of the 2022 Increases
The basic limit on elective deferrals is $20,500 in 2022, up from $19,500 in 2020 and 2021. Alternatively, SIMPLE plans’ elective deferral limit is 100% of compensation or $13,500 in 2020, 2021, and 2022. Additionally, several income ranges for determining eligibility increased for 2022. Among these are the ranges to make deductible contributions to traditional Individual Retirement Arrangements (IRAs), to contribute to Roth IRAs, and to claim the Saver’s Credit. Finally, taxpayers can deduct contributions to a traditional IRA if they meet specific conditions. For example, suppose during the year either the taxpayer or the taxpayer’s spouse was covered by a retirement plan at work. In that case, a deduction is phased out completely. These are the phase-out ranges for 2022:
- For single taxpayers covered by a workplace retirement plan, the phase-out range increases to $68,000 to $78,000, up from $66,000 to &76,000.
- For married couples filing jointly, if the spouse making the IRA contribution has a workplace plan, the range increases to $109,000 to $129,000. Previously the range was from $105,000 to $125,000.
- For a non-covered IRA contributor (married to a covered individual) the phase-out range is $204,000 to $214,000. This is an increase from $198,000 to $208,000.
- For a covered married individual filing a separate return, the range is not subject to an annual COLA and remains $0 to $10,000.
Implications for Employers
The tax law places limits on the dollar amount of several contributions. Namely, contribution limits apply to retirement plans and IRAs, as well as the amount of benefits under a pension plan. These limits are adjusted annually to account for cost-of-living increases. Employers offering benefits must note changes to contribution limits according to the 2022 COLA. Recognizing these yearly changes ensures employers avoid penalties associated with non-compliance.