Yes, there’s: “Good news, everyone!” (Or, almost everyone). The Treasury Department has raised 401(k) annual contribution limits for 2023.
That means lots of people now have the opportunity to save even more for their retirement - something we love. Here are the highlights from the Treasury Department announcement:
There’s pretty good news all around. The Treasury Department’s 2023 cost-of-living adjustment raised limits for both employee and employer contributions.
Most importantly:
limit increased $25,000 from $305,000 to $330,000. This will allow higher earners to receive a greater company contribution and can make it easier for many companies to pass their annual non-discrimination tests (particularly the Actual Deferral Percentage test).
Compensation thresholds for Key Employees and Highly Compensated Employees increased from $135,000 in 2022 to $150,000 in 2023. Key employee income thresholds also increased from $200,000 in 2022 to $215,000 .
This means potentially substantial changes to your ACP, ADP, or Top-Heavy nondiscrimination tests. Employees who counted as HCE’s the tax year before may actually be NHCE’s for your future testing.
Thankfully, these changes don’t mean tons of work for you, but, nevertheless, there are a few actions you should take to maintain the health of your qualified retirement plan and the happiness of your employees.
Here are some things to consider when adjusting to the new 2020 401(k) contribution limits:
Let's face it, even though people care (and worry) about their retirement savings, most employees aren’t exactly following the IRS on Twitter. So unless you tell them, they might not know about the opportunity for increased deferrals.
Naturally, employees should be aware of the changes to annual contribution limits and what it means for them (and their savings). As the plan administrator, it’s your duty to make them aware of changes that will impact their retirement savings.
Here’s a quick email template to help you share the good news:
Hello,
This is a message with important information about your 401(k) retirement benefit plan.
The Treasury Department has recently adjusted 401(k) contribution limits, meaning you can save more for retirement!
Simple instructions for changing your deferral rate:
[Ensure that the instructions below match with those for your business. These are general instructions.]
To increase your deferral rate, simply log into [YOUR 401(K) PROVIDER] and enter in your new deferral rate. Please send a note to [PAYROLL OR HR ADMINISTRATOR] when you do so.
Once you’ve made the update and alerted [PAYROLL OR HR ADMINISTRATOR], your rate will be updated and you paycheck amounts will change accordingly to account for the increased withholdings.
Happy saving!
*See section below about employees with multiple retirement accounts.
Hopefully, your employees will want to take advantage of these contribution increases and put more into their retirement accounts. To help your employees, make it easy and simple for them to change payroll deferral rates.
In addition to providing instructions in your contribution limit update email (like we did in the template above), make sure that they receive a confirmation email which restates the change. It’s also not a bad idea to host a presentation or meeting to go over the changes and answer any questions in real-time. It can save a ton of emails later.
An easy deferral-change process means employees are more likely to make changes, contributing more to the plan, and saving more for their golden years - which is everyone’s goal here.
Over-contribution means having to deal with a long series of headaches to make up for the mistake. This usually results in unhappiness all around. Employees face a potentially significant financial inconvenience, and as plan administrator, it’s mostly your problem to deal with.
Careful administration can prevent accidental over-contribution. That means serious care has to be taken with calculating and setting up payroll deferrals.
Employees with multiple retirement accounts can be more vulnerable to accidental over-contribution. The annual 401(k) deductible contribution limits apply to their total contributions to all 401(k) plans.
Employees with multiple plans will have to take more care to distribute the contributions without going over the annual limit. Consider alerting your employees to this when you send the IRS limit increase notification message.
Payroll integration can save you some headaches when the annual audit rolls around, but it’s important to be aware that not all payroll processes are created equal. Some integrated payroll systems can accidentally accept participant contributions that actually exceed the annual plan limit, which means the headaches don’t go away, they get worse.
That’s where validation checks come in.
Payroll integrations that involve validation checks will prevent over-contribution from happening in the first place, meaning you don’t have to spend your valuable time on fixing mistakes months down the line.
It’s not often that IRS bureaucrats are the bearers of good news, so why not enjoy it?
Contribution limit increases are never a bad thing. Even if the average employee at your company isn’t maxing out their deferrals, it’s important that the cost-of-living adjustment has been made.
As we’ve said, that’s all good news. The only downside is that, well, changing deferrals may mean more work for you. If you’re drowning in deferral change requests, or any of the other burdensome work of 401(k) administration, ForUsAll can help!
Our automated 401(k) administration & compliance solution synchronizes your payroll and recordkeeping systems, so you don’t have to spend time depositing contributions, updating deferral rates, or any of that other 401(k) busywork.
The best part?
ForUsAll provides a 3(16) fiduciary that takes on the legal responsibility for plan administration.
Schedule a quick, 10 minute demo today to learn how ForUsAll can help you save time, stay compliant, and keep your plan audit ready.
David Ramirez, CFA, is a recognized 401(k) expert with over 20 years of experience in 401(k), ERISA, cash balance plans, and ESOPs. A UC Berkeley graduate, he played a pivotal role at Financial Engines, a 401(k) advisory firm founded by Nobel Laureate William Sharpe, Ph.D., where he was a portfolio manager who helped manage over $50B in 401(k) assets. His clients included some of the largest Fortune 500 companies and state governments.
Give your employees more than just a 401(k), join the movement.
