Over at our sibling website myNQDC.com, all about nonqualified deferred compensation (NQDC) plans, an important annual development has just dropped for NQDC participants who are starting to think about how much of next year's salary to defer into their plan's piggy bank.
In November and December, many executives and key employees eligible to participate in NQDC plans must decide how much, if any, of next year's salary to defer. Factors in this decision about nonqualified plans include the IRS limits that apply to qualified retirement plans. The IRS just set these limits for 2020.
The contribution limits of qualified plans are the major reason for the existence of nonqualified plans: to allow executives and key employees to save additional amounts for retirement with an elective nonqualified plan or an excess 401(k) plan. The changes in limits from 2019 to 2020 are slight. If you've already maxed out your qualified plan contributions for 2019, you will probably do the same in 2020, so you will need NQDC plans to defer any salary and bonus increases you expect in 2020.
| Contribution type/limit | 2019 | 2020 |
| Compensation allowed in qualified deferral and match calculation | $280,000 | $285,000 |
| Elective compensation deferrals | $19,000 | $19,500 |
| Catchup contributions for people aged 50 or older | $6,000 | $6,500 |
| Total defined contribution limits (employee and employer contributions) | $56,000 + catchup contribution | $57,000 + catchup contribution |
| Defined benefit plan payout limits | $225,000 | $230,000 |
| Income threshold defining key employees for the purposes of top-heavy plans and the six-month delay on payout upon separation | $180,000 | $185,000 |
| Income threshold defining highly compensated employees for the purposes of nondiscrimination testing; this also applies to the income point where companies can exclude employees from a tax-qualified ESPP | $125,000 | $130,000 |
Set by the Social Security Administration, the Social Security wage cap will rise in 2020 to $137,700, a slight increase from $132,900 in 2019. With the 6.2% rate of Social Security tax, the maximum possible Social Security withholding is $8,239.80 in 2019 and will rise to $8,537.40 in 2020. Social Security tax (up to the yearly limit) and Medicare tax (uncapped) are withheld at the time of deferral, as shown by an FAQ at myNQDC with an annotated diagram of Form W-2 showing where these amounts are included.
For a table comparing the features of 401(k) plans and NQDC plans, and their relative advantages and disadvantages, see an FAQ at myNQDC. See also our FAQ on the top NQDC-related year-end-planning issues.
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