The start of a new year brings a host of updates and changes to employee benefit plans. If you are an employer or benefits administrator, it is important to stay up-to-date on the latest benefit plan limits and thresholds to ensure that your plans are in compliance with the law and that you are providing the best possible benefits to your employees.
In this article, we will provide an overview of the benefit plan limits and thresholds for 2023, including updates to 401(k) plans, health savings accounts (HSAs), high-deductible health plans (HDHPs), flexible spending accounts (FSAs), and other miscellaneous benefits.
401(k) plans are a popular retirement savings option for many workers, allowing them to contribute a portion of their salary to a tax-advantaged account. Each year, the IRS sets limits and thresholds for 401(k) plans to ensure they are fair and flexible for employees and employers.
Maximum employee elective deferral
The maximum employee elective deferral is the maximum amount an employee can contribute to a 401(k) plan in a given year. For the tax year 2023, the maximum employee elective deferral rises to $22,500, up from $20,500 in 2022 (for employees age 49 and under). Participants’ annual contributions may not exceed 100% of their compensation.
Employee catch-up contribution
A 401(k) employee catch-up contribution is an additional contribution that an employee age 50 or over can make to their 401(k) plan above the regular contribution limit. The purpose of the catch-up contribution is to allow older employees to set aside more money for retirement. For 2023, the catch-up contribution limit increases to $7,500 from $6,500. This limit applies from the start of the year for those turning 50 at any time during the year.
Maximum employee elective deferral plus a catch-up contribution
The maximum employee elective deferral plus catch-up contribution for a 401(k) plan is the total amount that an employee age 50 or over can contribute to their 401(k) plan in a given year. For 2023, the total maximum elective deferral plus catch-up contribution has increased to $30,000 from $27,000.
Defined contribution maximum limit
The defined contribution maximum limit is the maximum amount that an individual can contribute to all defined contribution plans (such as 401(k) plans, 403(b) plans, and most profit-sharing plans) in a given year. The defined contribution maximum limit is designed to ensure that individuals do not exceed certain limits on tax-advantaged retirement savings.
For employees aged 49 or younger, this limit has increased to $66,000 from $61,000. For those aged 50 and older, the limit increased to $73,500 (up from $67,500). Total contributions from all sources may not exceed 100% of a participant’s compensation.
Employee compensation limit for calculating contributions
The employee compensation limit is a limit on the amount of an employee’s salary or wages that can be taken into account when calculating contributions to a 401(k) plan. The purpose of the employee compensation limit is to ensure that contributions to a 401(k) plan are based on a reasonable amount of an employee’s pay.
The compensation limit for the 2023 tax year has increased to $330,000, up from $305,000.
HSA and HDHP Limits
An HSA, or Health Savings Account, is a tax-advantaged account that can be used to pay for medical expenses. HSAs are often paired with high-deductible health plans (HDHPs), which are health insurance plans with relatively high deductibles and lower premiums.
HSA contribution limit
The HSA limit is the maximum amount that can be contributed to an HSA. It is set by the IRS and subject to annual adjustments for inflation. For individuals, the 2023 contribution limit has increased to $3,850 from $3,650. For family accounts, the 2023 contribution limit is $7,750, up from $7,300.
HDHP minimum deductibles
The HDHP minimum deductible is the minimum amount an individual must pay out-of-pocket for covered medical expenses before their health insurance plan begins to pay for their care. For the tax year 2023, the HDHP minimum deductible for self-only coverage is $1,500, and the minimum deductible for family coverage is $3,000.
HDHP maximum out-of-pocket amounts
The HDHP maximum out-of-pocket limit is the maximum amount that an individual must pay out-of-pocket for covered medical expenses in a given year before their health insurance plan begins to pay for all covered expenses at 100%. It’s worth noting that the HDHP maximum out-of-pocket amount applies only to covered medical expenses and does not include premiums or other types of non-covered expenses. For 2023, the maximum out-of-pocket amount for self-only coverage is $7,500, and the maximum out-of-pocket amount for family coverage is $15,000.
Health and dependent care limits
Health care flexible spending accounts (FSAs) and dependent care flexible spending accounts (DCFSAs) are tax-advantaged financial accounts that allow individuals to set aside a portion of their income to pay for certain health care or dependent care expenses. These accounts are usually offered by employers as part of a benefits package, but they can also be set up by individuals on their own.
HSA maximum salary deferral
For 2023, the maximum annual contribution to a healthcare FSA is $3,050, up from $2,850. This means that an individual can contribute up to $3,050 of their salary on a pre-tax basis to a health care FSA, and the funds will be used to pay for eligible out-of-pocket medical expenses.
Maximum rollover amount
The maximum rollover amount is the maximum amount of funds that can be carried over from one plan year to the next, rather than forfeiting their funds at the end of the year. For 2023, the maximum rollover amount is $610, up from $570.
FSA maximum salary deferral
The maximum salary deferral amounts have not changed for 2023; they remain at $5,000 for single taxpayers and married couples filing jointly and $2,500 for married couples filing separately.
Other benefit limits
QSEHRA maximum payments and reimbursements
A qualified small employer health reimbursement arrangement (QSEHRA) is a type of employer-funded benefit that allows small businesses to reimburse employees for medical expenses on a tax-free basis. To qualify as a QSEHRA, the employer must have fewer than 50 full-time employees and must not offer any group health plan to its employees. Employees enrolled in a QSEHRA can use the funds provided by their employer to pay for a wide range of medical expenses, including premiums for individual health insurance policies, out-of-pocket expenses not covered by insurance, and other qualified medical expenses. In 2023, the maximum annual QSEHRA contribution for single coverage is $5,850, and the maximum annual QSEHRA contribution for family coverage is $11,800.
Commuter transit and parking limits
Qualified transportation benefits are employer-provided benefits that allow employees to pay for their commuting expenses on a pre-tax basis. These benefits can include public transportation fares, such as bus or train tickets, as well as parking fees. For 2023, the monthly limitation on these benefits is capped at $300, up from $280. Ultimately, an employer can deduct up to $3,600 annually for qualified transportation benefits.
Adoption assistance excludable amounts are those that an individual can exclude from their income when calculating their tax liability for adoption assistance payments received from their employer. For 2023, the maximum excludable amount is $15,950, up from $14,890.
The excludable amount begins to phase out for individuals with modified adjusted gross income (MAGI) above $239,230 and is completely phased out for individuals with MAGI above $279,230.
Earnings subject to Social Security payroll tax
Certain earnings are subject to the Social Security portion of the Federal Insurance Contributions Act (FICA) tax. The FICA tax is a payroll tax that is levied on both employers and employees to fund the Social Security and Medicare programs. The Social Security portion of the FICA tax is currently imposed at a rate of 12.4% (6.2% paid by the employer and 6.2% paid by the employee). The maximum amount, known as the Social Security wage base, is adjusted annually for inflation. For the tax year 2023, the wage base is $160,200 (up from $147,000). This means earnings up to $160,200 are subject to the Social Security portion of the FICA tax. However, all earnings, regardless of amount, are subject to the Medicare portion of the FICA tax, which is currently imposed at a rate of 1.45%.
This article is intended to provide a brief overview of updated 2023 benefit limits. It is not a substitute for speaking with one of our expert advisors. For more information, please contact our office.