While the latest government data shows that inflation declined slightly last month, an updated forecast from Milliman shows that the 2023 IRS qualified retirement plan limits will likely set a record for a one-year increase, both in dollars and percentage.
With the publication of the July 2022 consumer price index (CPI) of 8.5% for the 12 months ended July 31, 2022, 10 of the monthly CPI rates are “set” and there are only two more months (August and September) that must be used as part of the IRS’s proscribed formula in setting the limits, explain Charles Clark, Milliman’s Director of Employee Benefits Research Group, and Abby Kendig, Consulting Actuary.
And while the CPI for the 12 months ended in July is 8.5%, down from 9.1% from the 12 months ended in June, the change of 0.6% has reduced the firm’s forecast for only two of the 2023 IRS limits—the compensation limit, and the individual and employer elective contribution limit to savings plans.
Clark and Kendig also note that the Inflation Reduction Act of 2022 does not change any of the formulas used in their updated forecast.
Using the Internal Revenue Code’s cost-of-living adjustment and rounding methods, the Consumer Price Index for All Urban Consumers (CPI-U) through July and estimated CPI-U values, Milliman projects that the contribution limits for 401(k), 403(b) and eligible 457 plan elective deferrals (and designated Roth contributions) will increase from $20,500 at present to at least $22,500 in 2023.
In addition, the 415(c) DC plan maximum annual addition—the sum of individual and employer contribution limits—is projected to increase from $61,000 to $66,000 in 2023, and the 414(q)(1)(B) highly compensated employee and 414(q)(1)(C) top-paid group limit is projected to increase from $135,000 to $150,000.
Other 2023 projected increases include:
- the 415(b) DB plan maximum annuity limit rising from $245,000 to $265,000;
- the 401(a)(17) and 408(k)(3)(C) compensation limit rising from $305,000 to $330,000; and
- the 414(v)(2)(B)(i) catch-up contribution limit for age 50 or older from $6,500 to $7,500.
The Milliman actuaries further review what could happen to the limits based on an analysis of the cumulative two-month changes in CPI for August and September 2022 that would result in the dollar amounts decreasing or increasing from the July forecast using the IRS rounding rules.
If, for example, the August and September 2022 change in CPI by month and cumulatively results in an increase of at least 0.50% per month (i.e., 1% for two months), then the 2023 limits will likely result in an increase in the compensation limit, and the sum of the individual and employer elective contribution limit compared to the July forecast.
In contrast, if there is a decrease of at least 1% per month (i.e., 2% for two months), then there will likely be a decrease in all of the limits compared to the July forecast.
“While we would have to dig deep into the archives of IRS limit changes, where the mathematical formula was overridden by an enacted change in pension law, we are modestly confident that this July forecast will match the official IRS 2023 limits, likely to be published in the first few days of November 2022,” Clark and Kendig emphasize.
