2023 Retirement Limits Jump on Record Inflation: $22,500 Deferrals and a $7,500 Catch-Up

Key takeaways

• The 2023 elective deferral limit for 401(k), 403(b), and most 457(b) plans increases to $22,500, up from $20,500 in 2022 — a $2,000 increase, larger than any single-year COLA adjustment in recent memory.
• The catch-up contribution limit for participants age 50 or older increases to $7,500 for 2023, up from $6,500. Total contributions for catch-up-eligible participants can reach $30,000.
• The IRA contribution limit increases to $6,500, up from $6,000. The IRA catch-up contribution for those 50 or older remains $1,000 (not COLA-indexed under current law).
• The § 415(c) annual addition limit — governing total employer and employee contributions to a defined-contribution plan — increases to $66,000 for 2023, up from $61,000.
• SECURE 2.0, enacted December 29, 2022, will further modify retirement limits and catch-up rules beginning in 2024 and 2025. The figures in this alert are the 2023 limits in effect before those modifications take effect.

The 2023 limits in detail

2022 limit: $20,500 2023 limit: $22,500 Increase: $2,000

2022 limit: $6,500 2023 limit: $7,500 Increase: $1,000

2022 limit: $6,000 2023 limit: $6,500 Increase: $500

2022 limit: $1,000 2023 limit: $1,000 (unchanged; not COLA-indexed)

2022 limit: $61,000 2023 limit: $66,000 Increase: $5,000

2022 limit: $305,000 2023 limit: $330,000

2022 threshold: $135,000 (for determining HCE status in 2022 based on 2021 compensation) 2023 threshold: $150,000 (for determining HCE status in 2023 based on 2022 compensation)

2022 limit: $14,000 2023 limit: $15,500

2023: $750 (unchanged)

What the COLA increase means operationally

Payroll system updates

The deferral limit increase to $22,500 requires updating the annual cap in payroll systems for employees who will reach the new maximum. Employees who hit the prior $20,500 limit early in 2023 because they front-loaded contributions in prior years will now continue deferring until the new ceiling is reached. Payroll teams should confirm that automatic stop dates built into payroll systems reflect the 2023 figure, not the 2022 figure.

Participant communication

Plan administrators have an obligation to communicate material changes to plan participants. The limit increase is a material change for participants managing their deferral elections. A plan notice or enrollment-update communication sent before the first payroll of 2023 is the minimum standard.

Catch-up contribution eligibility

Participants who turn 50 in 2023 become eligible for the catch-up contribution for the first time. Their total deferral capacity increases to $30,000. Plan administrators should identify these participants in payroll and election systems, and should communicate the catch-up election opportunity to newly eligible participants.

Highly compensated employee threshold

The HCE threshold increase from $135,000 to $150,000 (measured on 2022 compensation for 2023 HCE status) may change which employees are classified as HCEs for nondiscrimination testing purposes. Plans should re-run their HCE identification process using the updated threshold.

The intersection with SECURE 2.0

SECURE 2.0 was signed into law on December 29, 2022 (as part of the Consolidated Appropriations Act of 2022, Pub. L. 117-328). The legislation makes numerous changes to retirement plan rules that take effect at various dates beginning in 2023.

SECURE 2.0 does not alter the 2023 contribution limits announced in Notice 2022-55 — those figures are the correct operational limits for 2023. But SECURE 2.0 does modify catch-up contribution rules beginning in 2024, when high-wage employees ($145,000 or more in prior-year wages) will be required to make catch-up contributions on a Roth basis. Plan sponsors should begin assessing whether their plans have a Roth feature and whether amendments will be required before the 2024 effective date.

Why the limit increase matters for high-income savers

A $2,000 increase in the deferral limit is not trivial. At a 37% federal marginal rate, an additional $2,000 of pre-tax deferral produces $740 of current-year federal tax savings. For a married couple both maximizing a 401(k) and both eligible for catch-up, the combined 2023 deferral capacity is $60,000 — $6,000 more than 2022. The tax savings on the incremental deferrals are meaningful, and the long-term compounding on tax-deferred growth at these levels is substantial.

Bottom line

The 2023 retirement limit increases are the largest in years, and the operational implications run from payroll configuration to participant communication to nondiscrimination testing. Sponsors who update their systems before the first 2023 payroll — and who communicate the changes to participants — avoid the compliance complications that come from running the year with outdated limits.