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.