Benefit Plans: 2023 COLAs

The Internal Revenue Service has announced the 2023 cost-of-living adjustments (COLAs) for benefit plans. All limits have increased.

• Annual compensation limit. The compensation limit for calculating benefits and contributions, for general and 401(k) discrimination testing and for determining tax deductions has increased to $330,000 for plan years beginning in 2023.
• Elective deferrals (401(k)/Roth/403(b)/457). The calendar year elective deferral contribution limit has increased to $22,500 in calendar year 2023.
• Catch-up contributions. The calendar year dollar limitation for catch-up elective deferral contributions for individuals who, in 2023, are age 50 or above remains unchanged at $7,500 in calendar year 2023.
• Highly compensated employee. For plan years ending in 2023, a “highly compensated employee” is one who (a) was a more-than-5 percent owner during the year or the preceding year, or (b) for the preceding year (i) had compensation in excess of $150,000 and (ii) if the employer elects for the plan year, was in the top-paid group of employees. (The top-paid group is the top 20 percent of the employees based on compensation.)
• Defined contribution plans. The annual dollar limitation on additions to defined contribution plans has increased to $66,000 for plan limitation years ending in 2023.
• Defined benefit plans. For plan limitation years ending in 2023, the annual dollar benefit limitation under a defined benefit plan has increased to $265,000. For participants who separated from service before January 1, 2023, the 100 percent of average high-three-years’ compensation limit is computed by multiplying the participant’s compensation limitation, as adjusted through 2022, by 0833.
• ESOP five-year distribution period. The dollar amount used in determining the maximum account balance in an employee stock ownership plan subject to a five-year distribution period has increased to $1,330,000 in 2023, while the dollar amount used to determine the lengthening of the five-year distribution period is increased to $265,000.
• Key employee in top-heavy plan. In defining who is a key employee in a top-heavy plan, for plan years ending in 2023, the compensation threshold for an officer has increased to $215,000.
• Health Flexible Spending Accounts. The 2023 salary reduction limit is $3,050.
• Health Savings Accounts. The calendar year contribution limit of 2023 is $3,850 for individuals and $7,750 for families.
• Social security taxable wage base. The social security taxable wage base for 2023 (applicable to integrated plans with plan years beginning in 2023) has increased to $160,200.