401(k) CURRENT EVENTS: IRS RELEASES 2023 ADJUSTED DOLLAR LIMITS FOR 401(k) PLANS

On October 21, 2022, the IRS released its annual notice, Notice 2022-55, setting forth the various dollar limitations for contributions and benefits under qualified retirement plans, including 401(k) plans. The new limits will go into effect as of January 1, 2023. Under the Internal Revenue Code, these limits are subject to annual adjustment to reflect increases in the most recent cost-of-living index. Most years, certain limits are increased while other limits may remain unchanged. Notably, for 2023, none of the limits that are subject to cost-of-living increases remain unchanged.

OBSERVATION: For 2023, because inflation is at near-record levels, there are more – and significantly greater — changes for 401(k) plans than there were last year (see IRS Releases 2022 Adjusted Dollar Limitations for 401(k) Plans for our November 2021 blog announcing last year’s dollar limit increases).

401(k) Adjusted Limits for 2023.

The most frequently encountered dollar limits for 401(k) plans, that will increase in 2023 from the parallel dollar limits that are in effect for 2022, are as follows:

• Elective Deferrals. The dollar limit for employee 401(k) elective deferral contributions is increased from $20,500 in 2022 to $22,500 in 2023.
• “Catch-Up” Contributions. The maximum dollar limit for “catch-up” contributions, which applies to employees who reach age 50 or older at any time during the calendar year, is increased from $6,500 in 2021 and 2022 to $7,500 in 2023. (This limit did not increase in 2022 from the dollar limit in effect for 2021.)
• Plan Compensation. The maximum amount of compensation that may be taken into account for qualified plan (including 401(k) plan) purposes is increased from $305,000 in 2022 to $330,000 in 2023.
• Annual Additions. The maximum contribution limit on “annual additions,” which takes into account both employer and employee contributions under defined contribution plans (including 401(k) plans), is increased from $61,000 in 2022 to $66,000 in 2023.
• “Highly Compensated Employees.” The dollar limit threshold for determining who is a “highly compensated employee” for 401(k) plan nondiscrimination testing purposes is increased from $135,000 in 2022 to $150,000 in 2023.
• “Key Employees.” The dollar limit threshold for determining who is a “key employee” for purposes of determining whether a 401(k) plan is “top-heavy” (another type of nondiscrimination test) is increased from $200,000 in 2022 to $215,000 in 2023.

Other Adjusted Limitations for 2023.

In addition to the above adjustments that pertain directly to 401(k) plans, Notice 2022-55 also makes certain other retirement plan-related adjustments for 2023, including adjustments to the dollar limits that apply to:

• Defined benefit retirement plans;
• Individual retirement accounts (“IRAs”);
• “Roth” IRAs;
• Code Section 403(b) plans;
• Governmental plans;
• Employee stock ownership plans (“ESOPs”);
• Simplified employee pensions (“SEPs”);
• “SIMPLE” retirement plans;
• Multiemployer plans; and
• Determinations as to the Retirement Savings Contributions Credit for low-income and moderate-income level employees.

Social Security Taxable Wage Base for 2023.

In a separate release, the U.S. Social Security Administration (“SSA”) announced on October 13, 2022 that the Social Security taxable wage base will increase from $147,000 in 2022 to $160,200 in 2023. Once an employee reaches this annual limit, his or her additional wages are no longer subject to Social Security withholding, though they can still count as “compensation” for retirement plan purposes, up to the annual compensation cap ($330,000 in 2023), subject to plan rules.

ACTION REQUIRED!

Plan administrators, Human Resources personnel, payroll managers, and others affected by the adjusted limits should make sure that their systems are timely updated to reflect the 2023 changes, and to inform employees about the new 2023 dollar limits in all relevant communications (for example, year-end open enrollment materials). Summary plan descriptions (“SPDs”), plan guidelines and procedures, and similar documents also will need to be reviewed and revised, as required. Notably, most plan documents themselves do not require amendments to reflect the adjusted limits. If you are in doubt, please ask your ERISA attorney or advisor to review your plan document for any needed changes.

The information and content contained in this blog post are for general informational purposes only, and does not, and is not intended to, constitute legal advice. As always, for specific questions concerning your 401(k) retirement plan, or for help in operating your plan during the current COVID-19 crisis, please consult your own ERISA attorney or professional advisor.