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2021 Cost-of-Living Adjustments (COLAs) for Retirement Plans

They’re here! A little later than in prior years, the IRS has finally released the contribution and other dollar limits that will apply to 401(k) plans and other tax-qualified workplace retirement plans for 2022. The contribution limits are increasing, which will allow employees and business owners to save more for retirement this year if they are able … unless other limits on plan contributions are triggered by the tests plans must pass each year to prove that plan contributions are not discriminatory in favor of higher-paid workers.

The contribution and other limits are adjusted each year for changes in the cost-of-living index. (In some years, the changes in the cost-of-living index do not meet the statutory thresholds to trigger increases.) Following the chart showing the new limits are explanations of how each limit affects plan operations and can potentially limit plan contributions to less than the maximum allowed by law.

2022 COLAS




Annual Compensation Limit




401(k) & 403(b) Elective Deferrals




457 (government & tax-exempt plan Elective Deferrals




Age 50 Catch-up Contributions




Defined Contribution Plan Limit




HCE Threshold




Key Employee




Taxable Wage Base




You can find more information on retirement plan COLAs on the IRS website:

Interaction of PLan Limits

Annual Compensation (a/k/a Compensation Cap) – Only a certain amount of a plan participant’s compensation may be used to calculate contributions or to perform nondiscrimination tests. For example, for 2022, if a participant earns $350,000 in compensation, the employer may only calculate the participant’s share of a profit-sharing contribution based on $305,000 – the annual compensation limit in effect for the year.

Elective Deferrals – A participant may defer no more than $20,500 from their salary into 401(k) and 403(b) plans for 2022. This limit applies for both pre-tax and Roth contributions made to all 401(k) and 403(b) plans for the year. This limit does not include catch-up contributions. Participants who participate in a governmental 457(b) plan have a separate deferral limit of $20,500 for that plan.

Catch-Up Contributions – 401k), 403(b), and governmental 457(b) plan participants age 50 or older may defer an additional $6,500 each year over the elective deferral limit, plan permitting. 403(b) plans and governmental 457(b) plans may have additional special catch-up provisions.

Defined Contribution Plan Limit (a/k/a Annual Additions Limit) – All employee and employer contributions (including forfeitures) allocated to a plan participant’s account for 2022 cannot exceed the lesser of:

  • 100% of the participant’s compensation, or
  • $61,000

Catch-up contributions may be made on top of this limit.

HCE Threshold – An HCE (highly compensated employee) is an employee who:

  • Owns more than 5% of the employer at any time during the year or preceding year, or
  • Earned more than $135,000 for 2022 from the employer and, if the employer elects, had compensation that ranked the employee in the top 20% of all employees.

HCE status is used to determine how employees are categorized for the 401(k) plan nondiscrimination tests: the Actual Deferral Percentage (ADP) test and the Actual Contribution Percentage (ACP) test. The ADP test limits the percentage of compensation the HCE group can defer into the 401(k) plan, based on the deferral rate of the non-highly compensated employee (non-HCE) group. The ACP test ensures that the employer matching contributions and after-tax employee contributions contributed for HCEs are not disproportionately higher than those for non-HCEs. An increase in the compensation amount to qualify as an HCE may reduce the number of employees (and therefore contributions) included in the HCE group, which may improve ADP/ACP test results.

Key EmployeeA key employee is an employee who

  • Owns more than 5% of the employer,
  • Owns more than 1% of the employer and has annual compensation of more than $150,000, or
  • Is an officer of the employer and has compensation of more than $200,000 (for 2022)

Key employee status is used to determine how employees are categorized for the top-heavy test, which measures whether plan assets are concentrated in the accounts of business owners or officers of the company earning a certain amount of compensation. A plan is top-heavy if more than 60% of its assets are held in the accounts of key employees. The determination is made as of the last day of the preceding plan year (December 31 for a calendar-year plan). If the plan fails the top-heavy test as of December 31, 2021, it will be considered top-heavy for 2022 and the employer may be required to make a contribution for non-key employees.

Taxable Wage BaseThe taxable wage base is the maximum amount of an employee’s compensation that is subject to Social Security tax. This limit is also used when allocating certain employer contributions in retirement plans that use the permitted disparity contribution formula (also known as Social Security integration). The taxable wage base limit is calculated and released by the Social Security Administration.


Start Here

Plan advisors, recordkeepers, and third-party administrators (TPAs) are among the best resources to help plan sponsors understand how their plan may be affected by the annual adjustments on plan limits. Plan sponsors may want to

  • Review the COLAs each year with their payroll staff or provider to make sure all necessary adjustments are made and confirm that the correct definition of compensation is being used for plan operations.
  • Analyze last year’s nondiscrimination testing results to determine whether changes to the groups of employees classified as HCEs or key employees could affect this year’s tests.