2023 Federal Payroll Updates: 401(k) Limit Increase, Tax Reduction & More

Written by The Human Resource Consulting Group | Jan 11, 2023 8:32:13 PM

As an employer, it's important to stay informed about the latest changes and updates to federal regulations that may impact your business. If employers fail to keep up to date on these regulations, they may face penalties, fines, or legal issues. If you need expert assistance regarding your company’s compliance, you can always seek help from an HR Consulting Company like The Human Resource Consulting Group.

Here's a quick overview of some of the key changes that employers should know about for the 2023 tax year.

Federal 401(k) Limit Increase

The IRS increased the 401(k) limit to $22,500 for 2023, up from $20,500 for 2022. The chart below compares the limits for 401(k), 403(b), and most 457 plans between 2023 and 2022.

Defined Contribution Plan Limits	2023	2022	Change
Maximum employee elective deferral	$22,500	$20,500	+$2,000
Employee catch-up contribution (if age 50 or older by year-end)*	$7,500	$6,500	+$1,000
Defined contribution maximum limit, all sources	$66,000	$61,000	+$5,000
Defined contribution maximum limit (if age 50 or older by year-end); maximum contribution all sources, plus catch-up	$73,500	$67,500	+$6,000
Employee compensation limit for calculating contributions	$330,000	$305,000	+$25,000
Key employees' compensation threshold for nondiscrimination testing	$215,000	$200,000	+$15,000
Highly compensated employees' threshold for nondiscrimination testing	$150,000	$135,000	+$15,000

For more information, please visit the IRS website.

Federal Tax Reduction for 2023 - The Inflation Reduction Act

The IRS's Inflation Reduction Act will bring some tax adjustments for the tax year 2023. Here are the highlights of changes for the tax year 2023:

The standard deduction for married couples filing jointly rises to $27,700
Marginal Rates: the top tax rate remains 37% for individual single taxpayers with incomes greater than $578,125
The Alternative Minimum Tax exemption amount is $81,300 and begins to phase out at $578,150
Maximum Earned Income Tax Credit amount is $7,430 for qualifying taxpayers who have three or more qualifying children
The monthly limitation for the qualified transportation fringe benefit and the monthly limit for qualified parking increases to $300
The dollar limitation for employee salary reductions for contributions to health flexible spending arrangements increases to $3,050
For Participants who have self-only coverage in a Medical Savings Account, the plan must have an annual deductible that is not less than $2,650 but not more than $3,950
The foreign-earned income exclusion is $120,000
Estates of decedents who die during 2023 have a basic exclusion amount of $12,920,000
The annual exclusion for gifts increases to $17,000 for the calendar year 2023
The maximum credit allowed for adoptions for the tax year 2023 is the amount of qualified adoption expenses up to $15,950

For more information, please visit the IRS website.

Note For Employers

Don't let the upcoming federal law changes catch you off guard. Stay ahead and act now to ensure compliance and protect your business. Contact The Human Resource Consulting Group for personalized guidance and support through the compliance process.

If you are an employer in the state of Connecticut, there are more state-specific labor law changes for 2023. Find out about it in this article.

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