The annual Cost of Living Adjustment (COLA) for benefit plan contributions has been made since 1975. Over the last 47 years, the adjustment has been an invaluable tool designed to help counteract the effects of inflation and other economic pressures. This is especially helpful in a year when inflation sharply increases due to supply chain issues and rising material/product costs. Looking forward to 2023, the IRS recently issued Notice 2022-55 which outlines the COLA for plan contributions in 2023. It comes as no surprise there was a large percentage increase to plan contribution limits. To help clients, prospects, and others, Whipplewood CPAs have provided a summary of the key details below.
What is COLA?
COLA increases are made annually to Social Security and Supplemental Security Income (SSI) to offset the cost of inflation. Inflation is measured using the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) for a designated period. The Bureau of Labor Statistics (BLS) sets the CPI-W, and the Social Security Administration (SSA) uses this to calculate COLAs.
IRC Section 415 requires these limits to be adjusted annually. Typically, adjustments are relatively modest year after year. However, 2022 saw a 5.9% rate adjustment, and 2023 will see an 8.7% increase which is a percentage jump not seen since the early 1980s.
COLA Limits for 2023 Summarized
IRA Contribution Limit
IRA Catch-Up Contributions
Traditional IRA AGI Deduction Phase-out Starting at
Single or Head of Household
SEP Minimum Compensation
SEP Maximum Contribution
SEP Maximum Compensation
SIMPLE Maximum Contributions
401(k), 403(b), Profit-Sharing Plans, etc.
Defined Contribution Limits
Defined Benefit Limits
457 Elective Deferrals
Control Employee (board member or officer)
Control Employee (compensation-based)
Taxable Wage Base
The historically large COLA increase comes as no surprise given current economic conditions. However, the change does permit taxpayers the opportunity to increase the amount of contributions in 2023. Not only is this practical but creates an additional dimension of tax savings. If you have questions about the information outlined above or need assistance with a tax or accounting issue, Whipplewood CPAs can help. For additional information call 303-989-7600 or click here to contact us. We look forward to speaking with you soon.