Max 401K Contribution 2023 : IRS Reveals 2023 Contribution Caps for 401(k)

Since it is now a new year, payroll managers need to get themselves caught up on the most recent alterations that have been made to the 401(k) contribution limitations. Even though there haven’t been many changes, there are a few significant ones that you should be aware of.

The maximum amount that an employee can contribute to their 401(k) plan each year will increase to $22,500 in 2023, up from $20,500 in 2022. Additionally, the overall annual contribution amount (employee contribution plus employer contribution) will increase from $61,000 in 2022 to $66,000 in 2022, reflecting the increase in the employee contribution. There is no upper limit on the amount an employer can contribute as long as the annual maximum is not met; nonetheless, the majority of corporations offer matching money at a rate of between three and six percent.

A 401(k) is a feature of a qualified profit-sharing plan that allows employees to contribute a portion of their wages to individual accounts.

• Elective salary deferrals are excluded from the employee’s taxable income (except for designated Roth deferrals).
• Employers can contribute to employees’ accounts.
• Distributions, including earnings, are includible in taxable income at retirement (except for qualified distributions of designated Roth accounts).

Deferral limits for 401(k) plans 

The limit on employee elective deferrals (for traditional and safe harbor plans) is:

• $22,500 in 2023 ($20,500 in 2022, $19,500 in 2021 and 2020; and $19,000 in 2019), subject to cost-of-living adjustments

Generally, you aggregate all elective deferrals you made to all plans in which you participate to determine if you have exceeded these limits. If a plan participant’s elective deferrals are more than the annual limit, find out how you can correct this plan mistake.

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Deferral limits for a SIMPLE 401(k) plan

The limit on employee elective deferrals to a SIMPLE 401(k) plan is:

• $15,500 in 2023 ($14,000 in 2022, $13,500 in 2021 and 2020; and $13,000 in 2019)
• This amount may be increased in future years for cost-of-living adjustments

2022 vs. 2023 401(k) Match Limits

The traditional IRA phase-out ranges for 2023 are:

• For single taxpayers covered by a workplace retirement plan, the phase-out range begins at $73,000 and ends at $83,000 (up from $68,000 and $78,000 in 2022).
• For married couples filing jointly, if the spouse making the IRA contribution is covered by a workplace retirement plan, the phase-out range increases to between $116,000 and $136,000 ($109,000 and $129,000 in 2022).
• For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the phase-out range increases to between $218,000 and $228,000 ($204,000 and $214,000).
• For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range is not subject to an annual cost-of-living adjustment and remains between $0 and $10,000.

Plan-based restrictions on elective deferrals

• Your plan’s terms may impose a lower limit on elective deferrals
• If you are a manager, owner, or highly compensated employee, your plan might need to limit your deferrals to pass nondiscrimination tests

Catch-up contributions for those age 50 and over

If permitted by the 401(k) plan, participants age 50 or over at the end of the calendar year can also make catch-up contributions. You may contribute additional elective salary deferrals of:

• $7,500 in 2023, $6,500 in 2022, 2021 and 2020 and $6,000 in 2019 – 2015 to traditional and safe harbor 401(k) plans
• $3,500 in 2023, $3,000 in 2022 – 2015 to SIMPLE 401(k) plans
• These amounts are subject to cost-of-living adjustments

You don’t need to be “behind” in your plan contributions in order to be eligible to make these additional elective deferrals.

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Catch-ups for participants in plans of unrelated employers

If you participate in plans of different employers, you can treat amounts as catch-up contributions regardless of whether the individual plans permit those contributions. In this case, it is up to you to monitor your deferrals to make sure that they do not exceed the applicable limits.

Example:  If Joe Saver, who’s over 50, has only one employer in 2020 and participates in that employer’s 401(k) plan, the plan would have to permit catch-up contributions before he could defer the maximum of $26,000 for 2020 (the $19,500 regular limit for 2020 plus the $6,500 catch-up limit for 2020). If the plan didn’t permit catch-up contributions, the most Joe could defer would be $19,500. However, if Joe participates in two 401(k) plans, each maintained by an unrelated employer, he can defer a total of $26,000 even if neither plan has catch-up provisions. Of course, Joe couldn’t defer more than $19,500 under either plan and he would be responsible for monitoring his own contributions.

The rules relating to catch-up contributions are complex and your limits may differ according to provisions in your specific plan. You should contact your plan administrator to find out whether your plan allows catch-up contributions and how the catch-up rules apply to you.