With the Consumer Price Index for all Urban Consumers (bls.gov) at 40-year highs, we are publishing this 2023 IRS Limits Forecast. Plan sponsors may wish to prepare for the changes to the limits for the retirement plans they sponsor and the effect on their labor costs and talent recruitment and retention efforts in 2023. This could permit them to budget for the costs in the wake of the "Great Resignation" (which registered an earthquake of 4.53 million in March 2022 according to the Job Openings and Labor Turnover Survey Home Page (bls.gov) and the declines in retirement account values due to the financial markets' volatile corrections and declines in 2022.
Our forecast of the 2023 IRS limits uses two assumption sets. One set is apocryphal (since the 2023 limits will not be calculated on the current trailing 12 months of CPI) and the second assumes that CPI will continue to increase each month for five months at 25 basis points (3.0% annual).
- The authors are members of the American Academy of Actuaries and are professionally unqualified to prepare economic forecasts. Therefore, the 3.0% increase is an estimate.
What are the IRS limits for qualified plans?
The IRS publishes the statutory annual dollar ceiling or limits that can be used in a plan sponsor’s benefit formula(s) that accumulate over time and are paid out from the trust of a tax-qualified retirement plan. "Retirement plan" refers to a defined contribution (DC) savings plan or a defined benefit (DB) plan. Payouts occur when a participant elects a distribution and notifies the employer to make the payments.
These statutory limits are on:
- Compensation used in the pension plan’s benefit and contribution formula(s)
- Contributions to savings plans from an individual participant
- Contributions to a savings plan in aggregate from both the employee and employer
- Annuity payments to retirees or their beneficiaries from a defined benefit plan
- Compensated amounts that distinguish between highly compensated and non-highly-compensated employees
How the 2023 IRS limits will be calculated
The 2023 IRS limits will be calculated using the 2022 IRS Limits (irs.gov) and applying a factor that is based on the Consumer Price Index in federal fiscal year (FFY) 2022. FFY 2022 is defined as the 12-month period from October 1, 2021, to September 30, 2022. As we publish the first forecast, the first seven months of FFY 2022 are complete, and there are five months remaining.
After the close of FFY 2022, the IRS will use the 12 months of reported CPI to calculate the 2023 IRS limits. (The calculations are somewhat more complex than just multiplying the 2022 limits by the CPI, but those details are omitted.) It is common for the IRS to release these values six to eight weeks later, in the month of November. Therefore the 2023 IRS limits will likely be officially released by IRS in November 2022. (The 2022 limits were announced on November 17, 2021.)
Should I care about the 2023 IRS limits forecast when I have so many other things to consider for my qualified plans?
“Perhaps” may be the best response but note that your 2023 plan year may start less than eight months from this May 2022 article publication date. Communication of the 2023 IRS limits to your administrative committees and participants may start in less than six months.
Plan sponsors are interested in what they have to do today, and what pressures they have on labor costs and talent retention that may have its genesis in federal tax law. We are providing this information in case it is useful to a company’s HR and Finance teams for future planning and budgeting.
- As an aside, the IRS published the 2023 limits in RP-2022-24 (irs.gov) for employer health insurance plans that feature health savings accounts (HSAs) and health reimbursement arrangements (HRAs). This permits employers to set expectations for their healthcare plans right now.
- Unlike the 2023 IRS limits, the annual increase for HSAs and HRAs is based on the Chained Consumer Price Index
Plan sponsors working with their compensation data may evaluate how many employees may be prevented from making contributions above the limit, or if the benefit is based on capped compensation. Higher IRS limits in 2023 may result in reduced costs for non-qualified pension plans, shifting an increased amount to the qualified pension plan.
Shouldn’t you be making an attempt to estimate the increase in Social Security metrics?
This forecast does not attempt to estimate the 2023 Social Security Taxable Wage Base (TWB) using the Social Security Administration’s complex calculation. The 2022 TWB increased by $4,200 (about 3%) from the 2021 TWB, which increased the annual payroll tax for both the employer and employee by $320 if the employee will earn more than $147,000 in both 2021 and 2022.
If the 2023 Taxable Wage Base increases by 5% for 2023, the increase would be $5,880 (to $152,880). The corresponding annual payroll tax increase would be about $450 for both the employer and the employee. Social Security recipients of monthly benefits would also see an increase for 2023, but that forecast is not in the scope of this article.
This forecast will be indexed each month for the remainder of the 2022 federal fiscal year. Please contact your Milliman consultant for details and questions on your retirement plans.
April 2022 forecast:
Inflation in the 12 months ending April 30, 2022, was 8.3%. With only five months remaining for FFY 2022, the 2023 IRS limits could be the highest one-year increase, both in dollars and percentage, even if inflation transitions to a more reasonable 3.0% annually for the final five months.
Our forecast table indicates that the limited compensation in 2022 ($305,000) could increase in a range of $20,000 to $25,000 in 2023. If an employer provides a match to the employee contribution of 3%, the match could increase by $600 to $750 per employee at the maximum compensation threshold. Only plan sponsors can analyze how many of their employees it would affect, with the wild card of the definition of compensation for their plans. For example, some plans use base salary only in the plan formula, while other employers may include additional pay, such as overtime or incentive compensation. Each pension plan formula is unique, and this analysis is agnostic to those definitions.
Figure 1: 2023 IRS limits forecast using actual federal fiscal year 2022 CPI as of April 30, 2022
|2022 IRS limits||Estimated 2023 IRS limits||Dollar increase from 2022 IRS limit|
|Category of annual IRS limits||Actual 12 month trailing CPI
as of 4/30/22
|7 month actual 4/30/22,
5 months forecast to 9/30/22
|Actual 12 month trailing CPI
as of 4/30/22
|7 month actual 4/30/22,
5 months forecast to 9/30/22
|HCE dollar amount||$135,000||$150,000||$145,000||$15,000||$10,000|
|Individuals' elective contributions to savings plans||$20,500||$22,500||$22,000||$2,000||$1,500|
|Individuals & employer's elective contributions to savings plans||$61,000||$66,000||$65,000||$5,000||$4,000|
|Catch-up contributions for age 50 and over||$6,500||$7,500||$7,000||$1,000||$500|
|DB annuity at age 65||$245,000||$265,000||$260,000||$20,000||$15,000|
Source: https://www.bls.gov/cpi/ retrieved May 12, 2022
Actual 12 month CPI-U of 8.3% ending April 30, 2022
Actual 7 month CPI-U ending April 30, 2022 and 0.25% per month for May through September 2022