For participants in nonqualified deferred compensation (NQDC) plans, it's time again to make like an autumn squirrel and decide how much to store for the future.
In November and December, many executives and key employees who participate in 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 under legislation in Congress). The IRS just set the qualified plan limits for 2022.
As explained at our sibling website myNQDC.com, the contribution limits of qualified plans are the major reason for the existence of nonqualified plans: to allow executives and key employees to squirrel away additional amounts for retirement with an elective nonqualified plan or an excess 401(k) plan.
The IRS changes in limits from 2021 to 2022 are relatively small. If you've already maxed out your qualified plan contributions for 2021, you will probably do the same in 2022, so you will need NQDC plans to defer any salary and bonus increases you expect in 2022. Also, depending on tax legislation in Congress, there may be higher tax rates in 2022 and/or beyond, increasing the need to defer income.
| Contribution type/limit | 2021 | 2022 |
|---|---|---|
| Compensation allowed in qualified deferral and match calculation | $290,000 | $305,000 |
| Elective compensation deferrals | $19,500 | $20,500 |
| Catchup contributions for people aged 50 or older | $6,500 | $6,500 |
| Total defined contribution limits (employee and employer contributions) | $58,000 + catchup contribution |
$61,000 + catchup contribution |
| Defined benefit plan payout limits | $230,000 | $245,000 |
| Income threshold defining key employees for the purposes of top-heavy plans and the six-month delay on payout upon separation | $185,000 | $200,000 |
| 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 | $135,000 |
Set by the Social Security Administration, the Social Security wage cap will rise in 2022 to $147,000, a slight increase from $142,800 in 2021. With the 6.2% rate of Social Security tax, the maximum possible Social Security withholding is $8,853.60 in 2021 and will rise to $9,114 in 2022. 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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