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2023 Cost-of-Living Adjustments (COLAs) for Retirement Plans

For September 2022, the U.S. Bureau of Labor Statistics reported an 8.2% inflation rate over the prior 12 months.1 Although this number is shocking after so many years of low inflation, it doesn’t come as a surprise to consumers. Most consumers have felt their reduced purchasing power at the grocery stores and in housing and insurance prices this year. Over time, inflation can significantly affect consumers’ retirement nest eggs too. Savers will need to accumulate bigger account balances to cover the same expenses in retirement. For example, something that cost $100 in 1997 would cost $184.93 today, 25 years later.2

Plan participants can fight the effects of inflation on their nest eggs by saving more. Those who can save more will be glad to know that the current high inflation rate has had a positive effect on the contribution limits for retirement plans. Because plan limits are adjusted each year relative to the cost-of-living index, the higher the cost of living gets, the more money participants are allowed to save in their retirement plans.

The chart below shows how the contribution and other limits have increased over the last few years as a result of the annual cost-of-living adjustments. Following the chart are explanations of how these limits apply to plan participants and plan operations.

Annual limits for retirement plans




Annual Compensation Limit for Calculating Contributions




401(k) & 403(b) Plan 

Elective Deferral Limit




457(b) Governmental Plan 

Elective Deferral Limit




Age 50 Catch-up Contribution Limit




Defined Contribution Plan 

Total Contributions Limit




Highly Compensated Employee (HCE) Threshold




Key Employee




You can find more information on retirement plan COLAs on the IRS website:


explanations of PLan Limits

Annual Compensation (a/k/a Compensation Cap) Only a certain amount of a plan participant’s compensation may be used to calculate contributions or to perform nondiscrimination tests. For 2023, if a participant earns $350,000 in compensation, the employer may only calculate the participant’s share of a profit sharing contribution based on $330,000 – the annual compensation limit in effect for the year.

Elective Deferrals A participant may defer no more than $22,500 from their salary into 401(k) and 403(b) plans for 2023. This limit applies for both pre-tax and Roth contributions made to all 401(k) and 403(b) plans for the year. This limit does not include catch-up contributions. Participants who participate in a governmental 457(b) plan have a separate deferral limit of $22,500 for that plan.

Catch-Up Contributions401k), 403(b), and governmental 457(b) plan participants age 50 or older may defer an additional $7,500 each year over the elective deferral limit, plan permitting. 403(b) plans and governmental 457(b) plans may have additional special catch-up provisions.

Defined Contribution Plan Limit (a/k/a Annual Additions Limit)All employee and employer contributions (including forfeitures) allocated to a plan participant’s account for 2023 cannot exceed the lesser of: 

  • 100% of the participant’s compensation, or 
  • $66,000. 

Catch-up contributions may be made on top of this limit.

HCE ThresholdAn HCE (highly compensated employee) is an employee who: 

  • Owns more than 5% of the employer at any time during the year or preceding year, or 
  • Earned more than $150,000 for 2023 from the employer and, if the employer elects, had compensation that ranked the employee in the top 20% of all employees.

HCE status is used to determine how employees are categorized for the 401(k) plan nondiscrimination tests: the Actual Deferral Percentage (ADP) test and the Actual Contribution Percentage (ACP) test. The ADP test limits the percentage of compensation the HCE group can defer into the 401(k) plan, based on the deferral rate of the non-highly compensated employee (non-HCE) group. The ACP test ensures that the employer matching contributions and after-tax employee contributions contributed for HCEs are not disproportionately higher than those for non-HCEs. An increase in the compensation amount to qualify as an HCE may reduce the number of employees (and therefore contributions) included in the HCE group, which may improve ADP/ACP test results.

Key EmployeeA key employee is an employee who  

  • Owns more than 5% of the employer,
  • Owns more than 1% of the employer and has annual compensation of more than $150,000, or 
  • Is an officer of the employer and has compensation of more than $215,000 for 2023. 

Key employee status is used to determine how employees are categorized for the top-heavy test, which measures whether plan assets are concentrated in the accounts of business owners or officers of the company earning a certain amount of compensation. A plan is top-heavy if more than 60% of its assets are held in the accounts of key employees. The determination is made as of the last day of the preceding plan year (December 31 for a calendar-year plan). If the plan fails the top-heavy test as of December 31, 2022, it will be considered top-heavy for 2023 and the employer may be required to contribute for non-key employees.

Taxable Wage BaseThe taxable wage base is the maximum amount of an employee’s compensation that is subject to Social Security tax. This limit is also used when allocating certain employer contributions in retirement plans that use the permitted disparity contribution formula (also known as Social Security integration). The taxable wage base limit is calculated and released by the Social Security Administration.


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Plan sponsors may want to

  • Review the COLAs each year with their payroll staff or provider to make sure all necessary adjustments are made and confirm that the correct definition of compensation is being used for plan operations.
  • Analyze last year’s nondiscrimination testing results to determine whether changes to the groups of employees classified as HCEs or key employees could affect this year’s tests. 
  • Communicate the contribution limit increases to plan participants to encourage stronger retirement savings.