Implications of Higher 2023 Benefit Limits

By Bolton October 25th, 2022

The IRS confirmed in Notice 2022-55 what we have been predicting - 2023 benefit limits reflect unusually large increases due to the highest inflation rates since indexing began. The final limits for 2023 are based on the 12-month change in the Consumer Price Index for All Urban Consumers (CPI-U) for the quarter ending September 30, 2022, prior to applying any statutory rounding rules. As of September 30, 2022, this average increase is 8.3% compared to an increase of 5.3% in the prior year.

The Social Security Taxable Wage Base is determined based on the change in the National Average Wage (NAW) two years in arrears (i.e., the change in NAW from 2020 to 2021 determines the increase in the taxable wage base from 2022 to 2023). These limits have been announced by the Social Security Administration and for 2023, the Social Security Taxable Wage Base is $160,200. The NAW for 2021 is $60,575.07.

These increases affect plan administration and budgeting for 2023. For example, employer contributions tied to employee deferrals or nonelective contributions may significantly increase the employer’s DC plan contribution for 2023. There are two drivers of this potential increase. First, the maximum deferral limit for all employees will increase by $2,000 and the Section 415 maximum contribution limit will increase by $5,000. For employees that contribute at these limitations, this will increase the total contributions eligible for matching dollars. Second, the limit on compensation that may be considered for highly paid individuals is increasing by $25,000.

In defined benefit plans that include highly paid individuals, demographic losses may be generated due to the increase in the compensation limit.[1] Employers that provide non-qualified restoration benefit plans may see either decreases (as the associated qualified plan is able to absorb more contributions) or increases (if the contribution formulas in the qualified plans are generous enough that the increase in the compensation limit overrides the deferral and contribution limits).

For plans that require coverage or nondiscrimination testing, the increased HCE limits and the compensation and benefit limits could change testing results. Plan administrators should be ready to tackle potential testing problems by working with their actuary or third-party administrator to develop early pro-forma results. This may identify possible testing challenges and actions that can be taken now to avoid a more costly correction of a failed test first discovered after 2023.

In conjunction with these increased benefit limits, employers should also begin discussions with employees about making health care choices. Employees could be encouraged to begin or increase their contribution rate or employers may begin or increase contributions to employees’ HSA accounts. These types of changes can increase engagement and enhance the perceived value of health care benefits.

Employers are working through an evolving relationship with their workforce while also managing the financial implications of the high inflationary environment. Total reward statements provide employees a snapshot of all the benefits provided and illustrate the value of the additional employer-provided indirect compensation when compensation and benefit costs are increasing. While these regulatory increases may create challenges, they also create opportunity for employers to showcase their benefit offerings.

For more information, contact a Bolton consultant today.

[1] Depending on the plan design, increases in the Social Security wage base table may partially offset these losses as a smaller proportion of the individual’s total compensation is credited at a higher benefit multiplier.