IRS RELEASES 2023 COST-OF-LIVING ADJUSTMENTS FOR EMPLOYEE BENEFIT PLANS

The IRS announced the 2023 cost-of-living adjustments (COLAs) for a wide variety of tax-related limits, including limits for health FSAs, qualified transportation fringe benefits, adoption assistance programs, qualified small employer health reimbursement arrangements (QSEHRAs), DCAPS and retirement plans.

Health & Welfare Benefit Limits:

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  • Health FSAs. For 2023, the dollar limit on employee salary reduction contributions to health FSAs will be $3,050 (up from $2,850). If the cafeteria plan permits health FSA carryovers, the maximum amount that can be carried over to the 2024 plan year is $610 (up from $570).
  • Qualified Transportation Fringe Benefits. For 2023, the monthly limit on the amount that may be excluded from an employee’s income for qualified parking benefits will be $300 (up from $280). The combined monthly limit for transit passes and vanpooling expenses for 2023 will be $300 (up from $280).
  • QSEHRAs. For 2023, the maximum amount of payments and reimbursements under a QSEHRA will be $5,850 for self-only coverage and $11,800 for family coverage (up from $5,450 and $11,050, respectively).
  • Adoption Assistance Exclusion and Adoption Credit. The maximum amount that may be excluded from an employee’s gross income under an employer-provided adoption assistance program for the adoption of a child will be $15,950 for 2023 (up from $14,890). In addition, the maximum adoption credit allowed to an individual for the adoption of a child will be $15,950 for 2023 (up from $14,890). Both the exclusion and the credit will begin to be phased out for individuals with modified adjusted gross incomes greater than $239,230 and will be entirely phased out for individuals with modified adjusted gross incomes of $279,230 or more.
  • DCAPs. The maximum amount of DCAP benefits that can be excluded from income has not been adjusted for cost-of-living changes (it is a non-indexed limit). That amount will remain at $5,000/$2,500 for 2023 and future years unless extended or otherwise changed by Congress. Nevertheless, there are adjustments to certain general tax limits that are relevant to the federal income tax savings under a DCAP. These include the 2023 tax rate tables, earned income credit amounts, and standard deduction amounts.

Retirement Plan Limits:

  • Annual Additions. The limit on annual additions (i.e., contributions) to 401(k) and other defined contribution plans will increase to $66,000 (up from $61,000). Code § 415(c)(1)(A).
  • Compensation. The annual limit on compensation that can be taken into account for contributions and deductions will increase to $330,000 (up from $305,000). Code §§ 401(a)(17) (for 401(k) and other qualified plans), 404(l) (for deductions), 408(k)(3)(C) (for simplified employee pension plans (SEPs)), and 408(k)(6)(D)(ii) (for salary reduction simplified employee pension plans (SARSEPs)).
  • Elective Deferrals. The annual limit on elective deferrals will increase to $22,500 (up from $20,500) for 401(k), 403(b), and 457 plans, as well as SARSEPs, and to $15,500 (up from $14,000) for SIMPLE plans and SIMPLE IRAs. Code §§ 402(g)(1), 457(e)(15), and 408(p)(2)(E).
  • Catch-Up Contributions. The annual limit on catch-up contributions for individuals age 50 and over will increase to $7,500 (up from $6,500) for 401(k) plans, 403(b) contracts, 457 plans, and SARSEPs, and to $3,500 (up from $3,000) for SIMPLE plans and SIMPLE IRAs. Code § 414(v)(2)(B).
  • HCE. The threshold for determining who is a highly compensated employee (HCE) will increase to $150,000 (up from $135,000). Code § 414(q)(1)(B).
  • Key Employee. The threshold for determining whether an officer is a “key employee” under the top-heavy rules (as well as the cafeteria plan nondiscrimination rules) will increase to $215,000 (up from $200,000). Code § 416(i)(1)(A)(i).