The IRS today released an advance version of Rev. Rul. 2021-3 providing tables of covered compensation under section 401(l)(5)(E) for the 2021 plan year.
Rev. Rul. 2021-3 [PDF 93 KB] provides that for purposes of determining covered compensation for the 2021 year, the taxable wage base is $142,800.
For the 2020 plan year, the taxable wage base was $137,700.
Today’s revenue ruling includes two tables to be used in determining benefits for defined benefit plans that use “permitted disparity” in employer-provided contributions or benefits (as allowed under section 401(l))—
“Permitted disparity” allows an employer to provide an additional benefit (either contribution or accrual) for employees whose compensation is above a certain limit, which is often the social security wage base. A qualified plan may be integrated with the social security limit to provide a more uniform benefit when taking into account that social security provides a benefit targeted at lower paid employees. “Permitted disparity” limits the differences that can be provided between lower and higher paid employees.
“Covered compensation” for an employee is defined by Reg. section 1.401(l)-1(c)(7) as the average of the taxable wage bases in effect for each calendar year during the 35-year period ending with the last day of the calendar year in which the employee attains social security retirement age. For purposes of determining the amount of an employee's covered compensation, a plan may use IRS-provided tables that are developed by rounding the actual amounts of covered compensation for different years of birth.
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.