The ‘Smart’ Thing to Do with a Refund of 2023 Taxes

2023 taxes, tax refund

Image credit: © Pavel Muravev | Dreamstime.com

Just filed my 2022 federal and state income tax returns. We are getting a federal refund (while forking over some more money to Ohio). How about you?

More importantly, how about those eligible for your 401(k)? Do you have workers who have received or will receive a tax refund, but are either not contributing to your 401(k), or not saving enough to qualify for the full employer financial support? Many miss out on some or all of the employer financial support.[i] Typically, 20% of eligible workers are not participating.[ii] And, typically, about the one-third of workers who contribute do not save enough to receive the full employer financial support.[iii]

If so, you have failed. Action is needed so workers do not repeat that mistake in 2023 and the future.

A Widespread, Longstanding Trend of Suboptimal Behavior

This is not new. To date, for the 2022 tax year, the IRS has received 101 million (MM) tax returns, and of those processed, 69 MM received tax refunds that averaged $2,898. Over 66 MM of those refunds were processed electronically, averaging $2,942.

In fact, in each of the past 10 years, there have been 109+MM federal income tax refunds averaging $2,800+[iv]:

  1. As of December 30, 2022, of the 165+ MM 2021 federal income tax returns, 110+MM generated a refund that averaged $3,252 where 100+MM of those refunds were direct deposited (DD)
  2. December 3, 2021, 169+ MM 2020 returns, 129+ MM refunds, average $2,815, 113+MM DD
  3. December 11, 2020, 169+ MM 2019 returns, 125+ MM refunds, average $2,549, 102+MM DD
  4. December 27, 2019, 155+ MM 2018 returns, 111+ MM refunds, average $2,869, 92+MM DD
  5. November 23, 2018, 154+ MM 2017 returns, 111+ MM refunds, average $2,899, 90+MM DD
  6. December 29, 2017, 152+ MM 2016 returns, 111+ MM refunds, average $2,895, 89+MM DD
  7. December 30, 2016, 152+ MM 2015 returns, 111+ MM refunds, average $2,860
  8. December 25, 2015, 151+ MM 2014 returns, 109+ MM refunds, average $2,797
  9. December 26, 2014, 149+ MM 2013 returns, 109+ MM refunds, average $2,918
  10. December 27, 2013, 148+ MM 2012 returns, 109+ MM refunds, average $2,929

Of course, averages can be deceiving. However, analysis of 2020 data suggests the median refund increases with income; and household with income at the national median got a refund of … wait for it … $2,800+ in 2020.[v]

Spend It, Save It—There’s A Lotta Bad Advice Out There

Most Americans have no specific guidance in their financial decision-making—including tax refunds. Unsurprisingly, general guidance in the marketplace usually fails to encourage workers to up their participation in their employer-sponsored, tax-qualified plan. Spending is certainly the norm. For example, on April 17th, I heard Robert Frank on CNBC’s Squawk Box note that 2022 refunds would be $300 lower than 2021 refunds which could “create a drag on consumer spending.” Instead, most recommend stuff like:

Worst of all, only one of the many articles I reviewed suggested you should “adjust your withholdings”—but not to save—instead, “to help offset those higher gas, restaurant or grocery bills all year long.”[vi]

“Catching-Up” on Company Contributions—True-Up Provisions

Check to confirm that your 401(k) has a “true-up” provision—so that, no matter when during the year a worker contributes, all contributions are considered in determining the company matching contribution. If not, no time like the present to make “true-up” a reality.[vii]

If you do not offer access to Health Savings Account-capable coverage, your workers have missed out on 20 years of access to the best option for funding retiree medical coverage—tax preferred employee and company contributions.[viii] No time like the present to make HSA-capable coverage a reality.

Finally, be sure that your 401(k) allows for a prospective change in contributions on any payday.

Social Influencing—Coworkers as a Financial “Concierge”

Face to face, individually or in small groups, schedule a 15-minute meeting with direct reports in the next month or so. Hand them a prepared sheet of questions—ask them to answer, confidentially:

Graphic credit: Jack Towarnicky

Some will suggest that they do not have enough take home pay. Consider the impact on take home pay from an increase in pre-tax contributions coupled with a change to federal income tax withholding. The IRS has a step-by-step guide to help you identify the estimated amount of refund for 2023 (to be paid in 2024). The guide also shows you how to file a new W-4 to lower your withholding without reducing the refund to $0.[x]

Looking for Something More Aggressive?

Long ago, in my last plan sponsor role, I had no qualms about workers who had other priorities and who missed out on the employer match.[xi] But, times change and over 15 years ago, we adopted a hyper-aggressive automatic enrollment, escalation, investment strategy.[xii]

Is the above “nudge” not enough for you? Want to go straight to shove? To be successful, to make sure those defaults stick, you must first ensure workers have sufficient access to tax-favored liquidity.[xiii]

Then, consider one of two options—consider amending your 401(k):

Got some better ideas on how to avoid suboptimal withholding where workers leave company match on the table? Send them in: jacktowarnicky@gmail.com

I am always interested in your comments, corrections, criticisms, and suggestions. Happy to guide you should you decide to add true-up or automatic escalation provisions to your 401(k) plan, or to introduce HSA-capable coverage alongside your 401(k).

Disclaimer No. 1: My comments are my own based on my past experiences in plan sponsor and consulting roles and do not necessarily reflect those of any employer or association I have been employed by or affiliated with, past, present, or future.

Disclaimer No. 2: Information was provided by individuals with knowledge and experience in the industry and not as legal or tax advice. The issues presented here may have legal implications, and you should discuss this matter with legal counsel prior to choosing a course of action. This article is intended to be informational only. It is not (and you/others should not use it as a substitute for legal, accounting, actuarial, or other professional advice. Any advice contained in this article was not intended or written to be used and cannot be used by anyone for the purpose of avoiding any Internal Revenue Code penalties that may be imposed on such person [or to promote, market or recommend any transaction or subject addressed herein]. You (others) should seek advice based on your (their) particular circumstances from an independent tax advisor.


[i] Plan Sponsor Council of America, 65th Annual Survey of Profit Sharing and 401k Plans, 2022. 4.7% of plans had no employer contributions. See also: Vanguard, How America Saves, 2022, “… 5% of plans made no employer contributions of any kind in 2021, and 1% of participants were in such a plan. …” Accessed 4/15/23 at: https://institutional.vanguard.com/content/dam/inst/vanguard-has/insights-pdfs/22_TL_HAS_FullReport_2022.pdf

[ii] Vanguard, note I, supra. “The participant-weighted participation rate was 81% in 2021 … Plans with automatic enrollment had a 93% participation rate, … participation rate of 66% for plans with voluntary enrollment.” 

[iii] Vanguard, note I, supra. “In 2021, two-thirds of participants received the full employer matching contribution. Participants in automatic enrollment designs were slightly less likely to receive the full employer match … However, after three years of automatic annual increases, participants in automatic enrollment designs are more likely tobe saving above the full employer match…”

[iv] Internal Revenue Service, Accessed 4/15/23 at: https://www.irs.gov/newsroom/filing-season-statistics-by-year

[v]D. Shepard, P. Huang, Average Tax Refund Rises 3% to $3,745, Led (Again) by Wyoming, Lending Tree, 3/6/23, Accessed 4/15/23 at: https://www.lendingtree.com/debt-consolidation/average-tax-refunds-study/

[vi] TurboTax, 12 Smart Things to Do With Your Tax Refund, 2/13/23, Accessed 4/15/23 at: https://turbotax.intuit.com/tax-tips/tax-refund/12-smart-things-to-do-with-your-tax-refund/L6SfIkAEh  See also: Moneywatch, How to use a tax refund to fight inflation, 3/27/23, Accessed 4/15/23 at: 

https://www.cbsnews.com/news/tax-refund-inflation-tips/  See also: New York Times, Your Money, What to Do with Your Tax Refund? Save for Emergencies, 4/7/23, Accessed 4/15/23 at: 

https://www.nytimes.com/2023/04/07/your-money/tax-refund-tips.html  See also: C. Bruck, WCNC, 7 smart ways to use your tax refund. Don’t spend your tax refund on just anything, make that money work for you. 4/13/23, Accessed 4/15/23 at: https://www.wcnc.com/article/money/personal-finance/smart-ways-use-tax-refund/275-9f784a23-c66f-4f03-b00d-c9605441c23c

[vii] J. Towarnicky, True-up, Catch-up, What’s up? 10/9/18, Accessed 4/15/23 at: https://www.psca.org/news/blog/true-catch-whats  See also: J. Towarnicky, It’s Not Too Late – But, Don’t Wait! 11/14/19, Accessed 4/15/23 at: https://www.psca.org/news/blog/it%E2%80%99s-not-too-late-don%E2%80%99t-wait

[viii] J. Towarnicky, HSAs and 401ks—Better Together (Part One) Even if all HSAs assets are expended on pre-retirement qualifying medical expenses, they will help in retirement preparation by leveraging tax preferences, 10/16/22, Accessed 4/15/23 at: https://401kspecialistmag.com/hsas-and-401ks-better-together-part-one/ See also: J. Towarnicky, HSAs and 401ks – Better Together (Part Two), Those who save in both a Health Savings Account (HSA) and a 401k can achieve a superior, synergistic outcome – dramatically better than participation limited to only one of the two accounts, 10/26/22, Accessed 4/15/23 at: https://401kspecialistmag.com/why-hsas-and-401ks-are-better-together-part-two/ See also: J. Towarnicky, Top 10 HSA Risks (401ks and HSAs, Better Together, Part Three) Superior Health Savings Account (HSA) designs avoid the Top 10 risks—risks of commission and omission. Done right, HSA-capable coverage will complement your 401k plan—in both the accumulation and decumulation phase, 11/10/22, Accessed 4/15/23 at: https://401kspecialistmag.com/top-10-hsa-risks-401ks-and-hsas-better-together-part-three/

[ix] Author’s Note: This example assumes a 50% match on the 1st 6% of pay.

[x] IRS, Tax Withholding Estimator, Accessed 4/15/23 at: https://apps.irs.gov/app/tax-withholding-estimator

[xi] J. Towarnicky, Leaving Match on The Table: Part 1 of 2 – Connecting the Dots. 2/5/18, Accessed 4/15/23 at: https://www.psca.org/news/blog/leaving-match-table-part-1-2-connecting-dots

[xii] J. Towarnicky, It’s Like 401k Groundhog Day in America—Again, 2/24/21, Accessed 4/15/23 at: https://401kspecialistmag.com/its-like-401k-groundhog-day-in-america-again/

[xiii] G. Li, P. Smith, New Evidence on 401(k) Borrowing and Household Balance Sheets, Federal Reserve Board, 3/26/09, Accessed 4/15/23 at: https://www.federalreserve.gov/pubs/feds/2009/200919/200919pap.pdf  See also: J. Towarnicky, Top 10 401k Plan Loan Myths, Mis-directions and Misrepresentations, 2/17/21, Accessed 4/14/23 at: https://401kspecialistmag.com/top-10-401k-plan-loan-myths-misdirections-and-misrepresentations/  See also: J. Towarnicky, Another Nobel Laureate in Economics Who Was Focused on 401(k) Plans – Part 2 of 3, 12/4/17, Accessed 4/15/23 at: https://www.psca.org/news/blog/another-nobel-laureate-economics-who-was-focused-401k-plans-part-2-3

[xiv] Author’s Note: Best would be to time this action on the date of any increase in pay, especially of your organization utilizes a Common Effective Date.

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