We now bring you important news for squirreling away retirement savings from our sibling website, myNQDC.com.
In November and December, many executives and key employees eligible to participate in nonqualified deferred compensation (NQDC) plans must decide how much of next year's salary to defer. Factors in this decision about nonqualified plans include the IRS limits that apply to qualified retirement plans (and this year also the outlook for future tax rates after the 2020 election). The IRS just set the qualified plan limits for 2021.
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 2020 to 2021 are slight. If you've already maxed out your qualified plan contributions for 2020, you will probably do the same in 2021, so you will need NQDC plans to defer any salary and bonus increases you expect in 2021. Also, depending on the election results, there may be higher tax rates next year, increasing the need to defer income.
| Contribution type/limit | 2020 | 2021 |
| Compensation allowed in qualified deferral and match calculation | $285,000 | $290,000 |
| Elective compensation deferrals | $19,500 | $19,500 |
| Catchup contributions for people aged 50 or older | $6,500 | $6,500 |
| Total defined contribution limits (employee and employer contributions) | $57,000 + catchup contribution |
$58,000 + catchup contribution |
| Defined benefit plan payout limits | $230,000 | $230,000 |
| Income threshold defining key employees for the purposes of top-heavy plans and the six-month delay on payout upon separation | $185,000 | $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 | $130,000 | $130,000 |
Set by the Social Security Administration, the Social Security wage cap will rise in 2021 to $142,800, a slight increase from $137,700 in 2020. With the 6.2% rate of Social Security tax, the maximum possible Social Security withholding is $8,537.40 in 2020 and will rise to $8,853.60 in 2021. 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.
Full access to myNQDC is available through individual subscriptions to premium membership or through corporate licensing. To start or renew your Premium Membership at myNQDC, please contact us (617-734-1979, [email protected]). Our online payment system is undergoing technical modifications. We can process your membership directly by phone or email you an invoice.
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