Good news for 401k plan savers!
The IRS recently released its cost-of-living adjustments for tax-qualified retirement plans (e.g., 401(k) plans), in IRS Notice 2023-75.
- The limit on employee contributions to a 401(k) plan increases from $22,500 to $23,000 (catch-up contributions remain the same at $7,500).
- The compensation threshold for determining highly compensated employees increases from $150,000 to $155,000.
- The compensation limit under a 401(k) plan increases from $330,000 to $345,000.
- The total contributions limit for a 401(k) plan increases from $66,000 to $69,000.
Two tips for today:
- Employers should confirm with their 401k recordkeepers and their payroll team that systems will be updated, as necessary, to reflect the new thresholds.
- Employers should confirm with their payroll department that an employee’s contributions will only be “turned off” once an employee contributes the maximum allowed as elective deferrals and catch-up contributions (if applicable)- in other words, employee contributions should not be stopped just because an employee’s compensation has reached the $345,000 threshold mid-year. We continue to see this glitch from time to time.
Bonus tip:
- Plan sponsors should consider reviewing their plan’s definition of compensation to ensure that it matches what the payroll department has programmed for 401(k) contributions. For example, are bonuses included? What about fringe benefits?
Applying an incorrect definition of compensation in payroll is a common issue for many plan sponsors (too many!).
Plan sponsors should work their ERISA counsel to review their pay codes in payroll and the plan’s definition of compensation. Identifying and correcting this issue as soon as possible is key to avoid expensive corrections.
If a plan sponsor uncovers a mistake in plan operation, ERISA counsel can assist the plan with making a correction in accordance with the IRS’s correction procedures.