Each year, the IRS makes cost of living adjustments (COLAs) to many of the limits on contributions to, and benefits from, qualified and non-qualified retirement plans. As we head into 2023, we will see some of the largest COLA increases in decades due to higher inflation, the effects of which are being felt by consumers nationwide. Below is a listing of some common limits to note for the upcoming plan year.
401(k) and 403(b) Elective Deferrals
- A plan participant may defer up to $22,500 from their salary into a defined contribution retirement plan in 2023 (excluding catch-up contributions), an increase of $2,000. Note that this amount includes both pre-tax and Roth contributions in aggregate, and it applies to all 401(k), 403(b), and SIMPLE IRA plans that an individual participates in for the year.
- If plan provisions allow it, an individual who is 50 or older in 2023 may make additional “catch-up” contributions of up to $7,500 (an increase of $1,000) over and above the $22,500 limit discussed above.
Defined Contribution Plan Limit
- The maximum annual contribution to an individual’s account in a defined contribution plan (a money-purchase, profit sharing and/or 401(k) plan) cannot exceed the lesser of 100% of the individual’s compensation or $66,000, an increase of $5,000. This amount includes employer contributions, employee 401(k) contributions, and forfeitures.
Annual Compensation Limit
- The maximum amount of an employee’s annual compensation which may be used for contribution or benefit calculation purposes is $330,000, up from $305,000 in 2022.
Highly Compensated Employee (HCE) Threshold
- Employees are placed either into an HCE group or a non-HCE group for 401(k) plan nondiscrimination tests (i.e., ADP and ACP). An HCE is an employee who:
- Owns more than 5% of the employer at any time during the year or preceding year, or
- Earned more than $150,000 for 2023 ($135,000 in 2022) from the employer and, if the employer elects, had compensation that ranked the employee in the top 20% of all employees.
Key Employee Threshold
- 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 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. For 2023, the compensation paid to an officer that would cause him or her to be classified as a “key employee” is $215,000, a $15,000 increase from 2022.
After reviewing the increases in the limits, plan sponsors should:
- Review the 2023 limits with your internal payroll staff or payroll service provider to make sure any necessary adjustments are made to incorporate the increased limits.
- Confirm that the correct definition of compensation from your plan document is being used to determine compensation for plan contributions.
- Identify your HCEs and key employees for 2022 and determine whether the increase in compensation thresholds will reduce the number of employees in these groups. If it does, your plan might be more likely to pass the nondiscrimination tests in 2023.
- If your plan fails any 2022 contribution limit or nondiscrimination tests, discuss potential correction options with your third-party administrator/service provider. Plan design changes may help your plan pass the necessary testing in the future.
Please contact us if you have questions about the information outlined above, our seasoned and experienced employee benefit plan professionals are here to help. You can also learn more about our Employee Benefit Plan Audit services by visiting our website.