2023 Year-End Testing Time
It’s that time again! The beginning of the year is the kickoff for submitting your year-end census data for compliance testing. Sponsors of calendar-year 401(k) plans subject to the Average Deferral Percentage (“ADP”) or Average Contribution Percentage (“ACP”) Tests (i.e., all Non-Safe Harbor Plans) must submit their 2023 census data now to ensure timely results.
Be sure to submit your annual census data and compliance questionnaires to your recordkeepers by their specific deadlines. Providing your census data timely allows recordkeepers sufficient time to process the compliance tests and deliver results to you before March 15th, which is the deadline for employers to process corrective refunds (for failed ADP tests, if applicable) without paying a 10% excise tax. Please contact Vita Planning Group if you have questions regarding your recordkeeper’s year-end requirements. For other important dates on the horizon, download our online Compliance Calendar.
2024 Contribution Limits
The employee contribution limits for 2024 are:
2024 Elective Deferral Limit: $23,000
Additional Catch-Up Amount (age 50+): $7,500
Audit Threshold Methodology Change
As a reminder, last year, the Department of Labor issued a change to the methodology for determining if a retirement plan is considered “large” for the purpose of Form 5500 reporting and the need for an independent audit of a retirement plan.
The new guidance indicated that the 100-participant threshold for determining large plan status will be based only on the number of participants (actively employed and/or terminated) with balances as of the first day of each year. Previously, this threshold included all eligible employees, even those with no balance. The revised methodology is generally seen as a welcome change for those smaller employers on the cusp of being considered a large plan. This change took effect for plan years beginning on or after January 1, 2023.
We expect recordkeepers and/or third-party administrators to incorporate this new counting method in their compliance review and determination of audit requirements for plan year 2023.
Despite numerous predictions of economic and market decline at the beginning of the year, both equity and bond markets rose substantially in 2023. Much of the rise was due to improving inflation figures in the second half of the year and the expectation of central bank easing in 2024 in the US and overseas. The US S&P 500 Index was up 26.6% in 2023, and the Bloomberg US Aggregate Bond Index was up 5.5% after having declined 18% and 13%, respectively, in 2022. These results are all the more remarkable as the S&P 500 fell 10%, and the Aggregate Bond Index declined 7% between July and October 2023. While US economic conditions are generally supportive of asset markets as we enter 2024, the biggest unknown is the US presidential election, which has historically heightened volatility throughout the year.
The US Bureau of Economic Analysis (“BEA”) announced that the US economy grew at an annual rate of 4.9% in Q3 2023, well in excess of the revised 2.1% growth in Q22. The Philadelphia Federal Reserve Bank’s survey of forecasters' median forecast for Q4 2023 GDP growth is unchanged at 1.2%, while the median forecast for the full year 2024 has crept up to 1.7%.3 The labor market continues to be strong. December 2023 saw non-farm payrolls grow by 216,000, and US unemployment was 3.7%, making this the longest period with unemployment below 4% since the 1960s4. The data would indicate that both American consumers and American businesses have shown great resilience during 2023 in maintaining consistent economic growth and healthy profit margins even with the current high level of interest rates.
Inflation has fallen from its most recent peak of 9% in June 2022 to 3% in December 2023, and the FED is now forecasting Core PCE inflation to be at 2.4% by the end of 2024. Lower inflation plus continued economic growth will allow the FED more leeway in determining its interest rate policy in 2024. The FED is still wary of the short-term impacts on inflation, such as OPEC production reductions that led to a spike in gasoline prices in the middle of 2023, but has stated its current round of interest rate increases is at an end with the possibility of cuts in interest rates in 2024 should the need arise.
Asset markets rallied strongly in Q4 2023. As we enter 2024, high equity and bond valuations may make it difficult to maintain the pace of asset market appreciation that we saw in the second half of 2023 into the first half of 2024. In addition to the heightened volatility that comes from a US election year, several market analysts think a mild recession is possible in 20245. For example, Germany (Europe’s largest economy) is experiencing a contraction in economic activity due to a slowdown in the manufacturing sector and a decrease in demand from China6. In the short term, we will look to the consumer to sustain economic growth in the US while keeping an eye on geopolitical developments and their possible impact on markets. Wishing you health and prosperity in the new year. Please reach out to the Vita Planning Group with any questions or concerns.
- Unless otherwise indicated, data and commentary for the Market Update is sourced from two JPMorgan Asset Management sources: 1) Guide to the Markets – U.S. Economic and Market Update, 1Q 2024, December 31, 2024, and 2) the “1Q 2024 Guide to the Markets Webcast” on January 2, 2024.
- https://www.bls.gov/news.release/pdf/empsit.pdf 5https://www.cnbc.com/2023/12/26/the-us-avoided-a-recession-in-2023-whats-the-outlook-for-2024
This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete, and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Past performance does not guarantee future results.
+The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is a market value weighted index with each stock's weight in the index proportionate to its market value.
++ Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices do not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends.
The Bloomberg Barclays US Aggregate Bond Index, or the Agg, is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States. Investors frequently use the index as a stand-in for measuring the performance of the US bond market.
The MSCI All Country World Index ex USA Investable Market Index (IMI) captures large, mid and small cap representation across 22 of 23 Developed Markets (DM) countries (excluding the United States) and 23 Emerging Markets (EM) countries*. With 6,062 constituents, the index covers approximately 99% of the global equity opportunity set outside the US.
The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada.
The MSCI Emerging Markets Index is a float-adjusted market capitalization index that consists of indices in 21 emerging economies: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey.
The FTSE NAREIT All Equity REITs Index is a free-float adjusted, market capitalization-weighted index of U.S. Equity REITs. Constituents of the Index include all tax-qualified REITs with more than 50 percent of total assets in qualifying real estate assets other than mortgages secured by real property.
The Consumer Price Index (CPI) is a measure of inflation compiled by the US Bureau of Labor Studies.