Each year, the Internal Revenue Service (IRS) evaluates the contribution limits for tax-advantaged savings plans. Increased cost of living, as measured by inflation, is the key factor in determining whether contribution limits will increase. With the inflation rate at 8.2% in the prior 12 months that ended September 2022, it’s no surprise that annual contributions to retirement savings plans, HSAs and FSAs will increase significantly in 2023.
|Savings Plan||2023 Limit||2022 Limit|
|401k, 403b and 457 plans||$22,500||$20,500|
(Individuals 50 and older)
|SIMPLE IRA Catch-Up Contribution
(Individuals 50 and older)
|IRA Catch-Up Contribution
(Individuals 50 and older)
|HSAs||$3,850 (Individual) / $7,750 (Family)||$3,650 (Individual) / $7,300 (Family)|
Important things for Your Employees to Consider when Increasing Contributions into Tax-Advantaged Savings Plans.
Each employee’s circumstances are unique. Deciding when and how much an employee should contribute to tax-advantaged accounts varies based on individual need and plan limitations. Offering a variety of tax-advantaged savings plans gives employees choice and flexibility in achieving their personal goals.
401k, 403b, 457 and SIMPLE IRA plans
401k, 403b, 457 and SIMPLE IRA plans may include a matching contribution from their employer. Most employees don’t contribute to the annual limits; however, it is a good practice to contribute at least enough to receive the full benefit of any company match. Encouraging employees to take advantage of the company match is always a good practice.
If your organization is improving its employee benefits package by implementing or increasing its company match for 2023, employees should be given advance notice of the plan design change. The notice period should provide employees enough time to take advantage of the increased benefit as soon as it is available with the timely submission of a deferral change request.
While saving more for retirement may seem better, it is important for employees to consider all sides of increasing their contributions into a retirement savings plan.
- Increased pre-tax contributions into the retirement plan is a great way to lower the employee’s taxable income today, deferring tax implications on the deferred funds until they reach retirement.
- Money set aside into a retirement savings plan is for just that, retirement. Once an employee defers a portion of their paycheck into a retirement savings plan, they no longer have unrestricted access to those funds until retirement, or age 59 ½.
- Many plans don’t offer an in-service distribution, which means employees cannot access the funds while employed unless they have an IRS-defined hardship or take a loan against their vested balance.
- In most cases, early plan withdrawals (including hardships and early distributions) are taxed and subject to a 10% early distribution penalty and in some cases, the penalty can be up to 25%.
- Plans that allow loans generally have annual maintenance fees for the life of the loan along with a standard distribution fee. Additionally, loans are repaid after-tax with interest, then are taxed again in retirement.
To avoid any potential penalties for taking money out early, employees should carefully consider their financial situation when determining what they can afford to defer into the plan.
Health Savings Accounts (HSAs)
Health Savings Accounts (HSAs) are tax-advantaged savings plans available to employees enrolled in qualifying, HSA-eligible high deductible health plans. HSAs allow employees to make payroll deducted contributions into the account on a tax-free basis. HSA funds are used to help pay for eligible medical, dental and vision expenses for the employee and their covered tax dependents. There are many advantages for employees contributing to an HSA.
- Both employee and employer contributions made into the plan are employee-owned and rollover from year to year, whether or not the employee is still working for your company.
- HSA contributions are tax-free and remain tax-free indefinitely as long as the funds are used to pay for eligible expenses.
- HSAs are interest-bearing and, in many cases, allow employees to invest funds once they meet a certain account balance.
- Much like a 401k, distributions can be taken in retirement penalty-free, but in such cases the distributions are taxed.
- HSAs are another opportunity to reduce taxable income now, with flexibility in accessing funds before retirement when used to pay for eligible expenses.
Employers offering a company contribution to an HSA should effectively communicate the amount of the contribution and when the employee should expect to receive it. The IRS defines annual HSA contribution limits as total contributions into the plan, including both employer and employee contributions. Employees want to be careful to only contribute to the total annual limit since excess contributions into the plan are generally subject to tax and penalties.
Flexible Spending Accounts (FSAs)
Flexible Spending Accounts (FSAs), like HSAs, allow employees to make payroll deducted contributions into the account on a tax-free basis and are used to help pay for eligible medical, dental and vision expenses for the employee and their covered tax dependents. There are several benefits and considerations for employees when deciding if and how much they should contribute to the plan.
- The tax savings to employees for setting aside funds in an FSA for known upcoming eligible expenses can be significant.
- Healthcare FSAs work similarly to a line of credit. Employees have access to the full year’s contribution as of the plan year effective date and pay it back through payroll deductions spread evenly over each pay period throughout the year.
- FSAs are use-it-or-lose-it plans that don’t allow most unused balances to be carried forward from year to year. For that reason, determining the amount to set aside into an FSA can be tricky.
- Employees should consider both need and tax advantages when deciding how much to contribute into the account.
- The FSA enrollment period occurs in advance of the plan year and the employee is committed to that amount regardless of changes in their medical, dental and vision needs during the year, unless there is a change in family status.
In 2020, the IRS expanded eligible expenses to include certain over-the-counter products, which can help employees exhaust unused account balances before the end of the year.
When offering FSA plans to employees, it may be beneficial to add a rollover feature, which allows employees to carry forward a pre-determined balance into the next plan year if left unused. This may help minimize some of the fear of losing any unused funds at the end of the year. In 2023, the IRS increased the allowable rollover maximum limit to $610, up from $570 in 2022.
Employees should work with an Investment Advisor or their Financial Planner regularly to determine the best tax-advantaged savings approach based on their individual financial situation, risk tolerance and number of years to retirement.
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