As inflation and expectations of further interest rate increases by the Federal Reserve continue to challenge the U.S. economy, a silver lining of sorts is the opportunity to save at record levels, on a tax-deferred basis. In Notice 2022-55, released on Oct. 21, 2022, the IRS announced the cost-of-living adjustments to the various dollar limitations applicable to qualified retirement plans for 2023. These adjustments, tied to the Consumer Price Index, are substantial and across the board.
Limit on Compensation. The maximum amount of compensation that may be counted for plan purposes in 2023 is $330,000, a $25,000 increase over the 2022 limit of $305,000. This new threshold applies for plan/limitation years beginning in 2023.
Limits on Contributions and Benefits. The maximum limit on annual additions to a defined contribution plan increases from $61,000 to $66,000, and the maximum annual benefit which may be accrued under a defined benefit plan jumps from $245,000 to $265,000. These new limits are applicable for plan/limitation years ending within 2023.
401(k) and 403(b) Deferral Limit. For purposes of 401(k), 403(b) and most 457 plans, the maximum limitation on voluntary salary deferrals for calendar year 2023 will be $22,500, a jump of $2,000 from the prior year’s limit. The cap on catch-up deferrals by those age 50 or older increases, for the first time since 2020, from $6,500 to $7,500.
Identification of Highly Compensated Employees. Effective for plan years beginning in 2023, a highly compensated employee is any employee who (a) was a 5% owner during the current or preceding year, or (b) who received compensation from the employer during the preceding year in excess of $150,000. This reflects a $15,000 increase in the compensation threshold that was applicable in 2022.
Taxable Wage Base. On Oct. 13, 2022, the Social Security Administration announced that the taxable wage base for 2023 will be $160,200, an increase of $13,200 over the 2022 level of $147,000. For those fiscal year plans that integrate contribution allocations with Social Security, the new wage base will be effective for plan years beginning in 2023. The Social Security Administration also confirmed that benefits will increase by a cost-of-living adjustment of 8.7%, which is the largest one-time increase since 1981. Increased benefit payments to Social Security recipients will begin on Dec. 30, 2022.
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