Back in June, Milliman projected that rampant inflation this year would lead to the 401(k) contribution limit for 2023 to jump to $22,000 from this year’s $20,500 limit. Now another major benefits consulting firm is projecting the limit will jump even higher—by another $500.
Projections released recently from Mercer indicate that 2023 contribution limits for qualified retirement plans will rise by “unprecedented amounts.”
While the official 2023 Internal Revenue Code limits will not be determined and announced until after September Consumer Price Index for All Urban Consumers (CPI-U) values are published in October, Mercer projects the limits for 401k, 403b and eligible 457 plan elective deferrals (and designated Roth contributions) will rise from $20,500 this year to $22,500 in 2023.
If Mercer’s projection holds true, that $2,000 increase would double this year’s increase of $1,000, which came after two years of no increases to the individual contribution limit.
The July 27 brief from Mercer’s Law and Policy Group notes the 2023 limits will reflect increases in the CPI-U from the third quarter of 2021 to the third quarter of 2022. Using this measure, inflation is projected to reach its highest level since indexing began, causing 7%-11% increases for most limits, based on their rounding levels.
“In addition, the non-SIMPLE plan catch-up limit—which has a large rounding threshold—will jump more than 15%. These record hikes come on the heels of 2021’s increases, which were the second highest ever at that time,” the brief states.
Mercer’s estimates are determined using the tax code’s cost-of-living adjustment and rounding methods, the CPI-U through June, and estimated CPI-U values for July, August, and September. The IRS usually announces official limits for the coming year in late October or early November. The 2022 limits were officially released on Nov. 4, 2021.
While Social Security benefits have a “hold harmless” rule to ensure that recipients don’t receive less from year to year due to inflation or increases in Medicare Part B premiums, there is no such rule for 401k or IRA contribution limits. The inflation adjustment and rounding rule only compares with the base year, so it doesn’t matter what the limit was in the previous year.
Mercer also projects the 415c defined contribution plan maximum annual addition will increase from $61,000 to $67,000, but notes the limit will be $66,000 if inflation is less than 0.25% per month for July, August and September. July CPI data will be released by Bureau of Labor Statistics the on August 10.
A full look at the brief’s 2023 projections, from Margaret Berger, Partner, Mercer’s Law & Policy Group, and James Chakan, Principal, Mercer Wealth, can be seen in the graphic below.
SEE ALSO:
• Major 2023 401k Contribution Limit Jump Predicted
• IRS Bumps 2022 401k Contribution Limit By $1,000
• Inflation Sparks Big Jump in 2023 HSA Contribution Limits
• High June Inflation Leads to Double-Digit Social Security COLA Prediction