The initial edition of our forecast includes how the limits are calculated and why they may be relevant for plan sponsors.
The 2023 IRS Limits will be finalized using a proscribed formula. 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 monthly CPI factors (August and September 2022) that will, and must, be used in that formula. Please note that the Inflation Reduction Act of 2022 does not change any of the formulas used in our updated Forecast.
Our initial forecast in May 2022 can be found here, and includes information on what the limits are for qualified retirement plans, how the limits are calculated, and why they may be relevant for certain plan sponsors.
July 2022 forecast
The CPI for the 12 months ended July 31, 2022, is 8.5%, down from 9.1% from the 12 months ended June 30, 2022. This change of 0.6% has reduced the forecast of two of the 2023 IRS Limits from our June forecast. The limits that have changed from the June forecast are in bold in Figure 1.
With only two months remaining for federal fiscal year (FFY) 2022, our forecast of the 2023 IRS limits will most likely show that FFY 2022 will set the record for a one-year increase, both in dollars and percentage. See Figure 1.
While there is no certainty to these forecasts, it is highly likely that, for 2023:
- The compensation limit will increase to at least $330,000 ($25,000 more than in 2022)
- The highly compensated employee (HCE) dollar limit will increase to at least $150,000 ($15,000 more)
- Individual elective contributions limit will increase to at least $22,500 ($2,000 more)
- The sum of individual and employer contribution limits will increase to at least $66,000 ($5,000 more)
- The catch-up contribution limit will increase to at least $7,500 ($1,000 more)
- The defined benefit (DB) plan annuity limit will increase to at least $265,000 ($20,000 more)
With the report from the BLS, we now have a better estimate for the 2023 IRS Limits, as can be seen in in Figure 1. This is 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 this July forecast using the IRS rounding rules.
| August 2022 and September 2022 change in CPI by month and cumulatively | 2023 IRS Limits likely change |
|---|---|
| Increase of at least 0.50% per month, i.e., ~1.00% for two months | Increase in comp limit and sum of individual and employer contribution compared to the July Forecast |
| Decrease of at least 1.00% per month, i.e., ~2.00% for two months | Decrease in all the limits compared to the July Forecast |
As a comparison, the CPI decrease in July 2022 of 0.01% contributed to the 12-month cumulative rate decrease of 0.60% mentioned above.
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.
The BLS is expected to release the August 2022 CPI results on September 13, 2022, at which time this forecast will be revised.
Your Milliman consultant is available to answer your questions.
Figure 1: 2023 IRS limits forecast using actual federal fiscal year 2022 CPI as of July 31, 2022
Values in bold have changed from the June 30, 2022 forecast
| Category of Annual IRS Limits | 2022 IRS limits | Estimated 2023 IRS limits | Dollar increase from 2022 |
|---|---|---|---|
| Compensation limit | $305,000 | $330,000 | $25,000 |
| HCE dollar amount | $135,000 | $150,000 | $15,000 |
| Individuals' elective contributions to savings plans | $20,500 | $22,500 | $2,000 |
| Individuals & employer's elective contributions to savings plans | $61,000 | $66,000 | $5,000 |
| Catch-up contributions for age 50 and over | $6,500 | $7,500 | $1,000 |
| DB annuity at age 65 | $245,000 | $265,000 | $20,000 |
Source: Consumer Price Index - July 2022 (bls.gov) retrieved August 10, 2022