Gibbons Corporate & Finance News
 

IRS Issues 2023 Cost-of-Living Increased Dollar Limits for

Tax-Qualified Retirement Plans


By: Steven H. Sholk


One of the most memorable performances in Cabaret is the duet of Joel Grey and Liza Minnelli singing “Money, Money, Money” with its rapier-like lyrics: “Money makes the world go ’round, it makes the world go ’round. A mark, a yen, a buck, or a pound. A buck or a pound, a buck or a pound, is all that makes the world go ’round. That clinking, clanking sound can make the world go ’round.” Underlying this song’s performance was the angst of the denizens of the ill-fated Weimar Republic struggling with pervasive inflation.
 

Steven H. Sholk

[email protected]

(973) 596-4639

On October 21, 2022, the IRS in Notice 2022-55 released the 2023 cost-of-living increased dollar limits for tax-qualified retirement plans. Qualified retirement plans are an important part of making the world go ’round for millions of Americans. The increases are the largest ever and reflect a 40-year-high rate of inflation. Whether these increases will relieve or deepen the angst of millions of Americans struggling with pervasive inflation will turn on whether the nation’s leaders and policymakers have the wisdom of Solomon and the courage of Lincoln to appropriately tame inflation. Since it is uncertain whether they do, this uncertainty, as long as pervasive inflation is untamed, will only deepen the angst.


The 2023 increased dollar limits are set forth in the following table:

Dollar Limits

2022

2023

Maximum annual benefit from a defined benefit plan under IRC §415(b)(1)(A)

$245,000

$265,000

Maximum annual contribution to an individual’s defined contribution plan account under IRC §415(c)(1((A)

$61,000

(plus catch-up)

$66,000

(plus catch-up)

Elective contribution limit under IRC §402(g)(1) (for 401(k), 403(b), most 457(b) plans, and the federal government’s Thrift Savings Plan)

$20,500

$22,500

Maximum annual compensation taken into account to determine benefits or contributions under IRC §401(a)(17), 404(l), 408(k)(3)(C), and 408(k)(6)(D)(ii)

$305,000

$330,000

Amount to determine maximum account balance in an employee stock ownership plan subject to a 5-year distribution period under IRC §409(o)(1)(C)(ii)

$1,230,000

$1,330,000

Amount to determine extension of the 5-year distribution period in an employee stock ownership plan under IRC §409(o)(1)(C)(ii)

$245,000

$265,000

Compensation to determine a key employee in a top-heavy plan under IRC §416(i)(1)(A)(i)

$200,000

$215,000

Threshold amount in the definition of highly compensated employee under IRC §414(q)(1)(B)

$135,000

$150,000

Limit under IRC §408(p)(2)(E) for salary deferral contributions to SIMPLE retirement accounts

$14,000

$15,500

SIMPLE catch-up contribution limit under IRC §414(v)(2)(B)(ii)

$3,000

$3,500

Limit on qualified gratuitous transfer of qualified employer securities to an employee stock ownership plan under IRC §664(g)(7)

$55,000

$60,000

Catch-up contribution limit under IRC §414(v)(2)(B)(i) for employees who are age 50 and over who participate in 401(k), 403(b), most 457(b) plans, and the federal government’s Thrift Savings Plan

$6,500

$7,500

Minimum compensation under IRC §408(k)(2)(C) for simplified employee pensions (SEPs)

$650

$750

IRA contribution limit

$6,000

$6,500

IRA catch-up contribution limit for individuals age 50 and over (no increase)

$1,000

$1,000

The $22,500 and $30,000 (the sum of $22,500 and $7,500 catch-up) employee contribution limits apply to pre-tax contributions and after-tax Roth contributions to 401(k), 403(b), most 457(b) plans, and the federal government’s Thrift Savings Plan.


In addition, the Social Security Administration separately announced that an employee’s maximum taxable earnings subject to the Old Age, Survivors, and Disability Insurance (OASDI) tax will increase from $147,000 for 2022 to $160,200 for 2023. At the OASDI tax rate of 6.2 percent, each of the employer and employee will pay $9,932.


The Medicare hospital insurance tax of 1.45 percent for each of the employer and employee applies without any limit on an employee’s maximum taxable earnings. In addition, individuals with earned income of more than $200,000 ($250,000 for married couples filing jointly) will pay an additional 0.9 percent Medicare hospital insurance tax, again without any limit on an employee’s maximum taxable earnings over this amount.


The annual Section 401(a)(17) compensation limit of $330,000 for 2023 has an important effect on an exemption from Section 409A of the Internal Revenue Code for separation pay due to an involuntary separation from service or participation in a window program. Section 409A provides an intricate set of rules dealing with the time and form of payment of nonqualified deferred compensation, which often includes payments made to employees on separation from service. Employers and employees that grapple with these intricacies know that Section 409A serves as an integral part of God’s eternal punishment of man for Adam and Eve’s primordial sin of eating the Garden of Eden’s forbidden fruit: Man will eat bread only by the sweat of his brow.



Under the separation pay exemption of Treasury Regulation Section 1.409A-1(b)(9)(iii), the separation pay cannot exceed two times the lesser of: (1) the sum of the employee’s annualized compensation based on the annual rate of pay for the employee’s taxable year preceding the taxable year in which the employee separates from service (adjusted for any increase during that year that was expected to continue indefinitely); or (2) the maximum amount that may be taken into account under a qualified plan under Section 401(a)(17) for the year in which the employee separates from service. Accordingly, for employees that separate from service in 2023, the second prong of this limit is two times $330,000, or $660,000.
 
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