Executive summary: 2023 retirement plan limits adjusted
The IRS issued Notice 2022-55, which made modifications to the annual limits for retirement plans. These limits are updated annually for cost-of-living adjustments (with the exception of the individual retirement account (IRA) catch-up contribution limit, which is set by statute and is not impacted by cost-of-living adjustments).
2023 limits
Effective Jan. 1, 2023, the following limits are in effect:
|
2023 |
2022 |
2021 |
2020 |
401(k), 403(b) and 457 elective deferral limit |
$22,500 |
$20,500 |
$19,500 |
$19,500 |
Catch-up contribution limit (age 50 and older) |
$7,500 |
$6,500 |
$6,500 |
$6,500 |
Annual compensation limit |
$330,000 |
$305,000 |
$290,000 |
$285,000 |
Defined contribution plan limit |
$66,000 |
$61,000 |
$58,000 |
$57,000 |
Defined benefit plan limit |
$265,000 |
$245,000 |
$230,000 |
$230,000 |
Definition of highly compensated employee |
$150,000 |
$135,000 |
$130,000 |
$130,000 |
Key employee |
$215,000 |
$200,000 |
$185,000 |
$185,000 |
IRA contribution limit |
$6,500 |
$6,000 |
$6,000 |
$6,000 |
IRA catch-up contributions (age 50 and older) |
$1,000 |
$1,000 |
$1,000 |
$1,000 |
SIMPLE IRA and SIMPLE 401(k) salary deferral limit |
$15,500 |
$14,000 |
$13,500 |
$13,500 |
SIMPLE IRA and SIMPLE 401(k) catch-up limit |
$3,500 |
$3,000 |
$3,000 |
$3,000 |
Income phase-out ranges for various IRA purposes increased from between $68,000 and $78,000 to between $73,000 and $83,000 for single and head-of-household taxpayers. Similar incremental changes were made to the limits for married filing jointly and married filing separately taxpayers. For more information, see Notice 2022-55.
Notable increases
The change to the 2023 limits shows even more significant increases than was seen for the 2022 limits due to the inflation seen over the last year. The overall limit for employer and employee contributions to a defined contribution plan jumped from $61,000 to $66,000 and the annual accrual limit for a defined benefit pension plan moved up to $265,000 from last year’s $245,000. The increases are five and four times larger than the historical patterns for these limits. Additionally, the limit on the deferrals an individual can contribute to a traditional 401(k) plan has increased by $2,000, with those age 50 and older having a cumulative $3,000 increase (including the catch-up contribution).
Additional considerations – pending legislation
Retirement plan legislation, being collectively referred to as SECURE 2.0, has been discussed by both the House and the Senate during this year. Although it remains to be seen if and when this legislation will ultimately pass, many believe SECURE 2.0 will pass by the end of 2022. If it passes, there could be impacts to some of these limits. Proposed changes include increasing the catch-up limit for 401(k) plans and applying cost-of-living adjustments to the IRA catch-up contribution limit, among others.
Takeaway
Taxpayers should be aware of the changes that the IRS made to retirement plan limits, which become effective Jan. 1, 2023. Employers and employees should review these limits and take any necessary action to prepare for these limit changes by January. For example, an employer should work with its third-party administrator to ensure processes are in place to honor these limits, and employees should also be cognizant of these limits so that they are not exceeded. Employers sponsoring retirement plans that run on a fiscal year should be careful in applying these changes, as some limits are always calendar-year limits (e.g., the elective deferral limit), while other limits apply on a plan-year-beginning basis (e.g., the annual compensation limit).
