Retirement-Planning Alert: How 2024 IRS Limits On Tax-Qualified Plans Affect Nonqualified Deferred Comp
08 November 2023
Executives and highly compensated employees often have both equity comp and the opportunity to participate in a nonqualified deferred compensation (NQDC) plan. For many NQDC plan participants, it’s time again to make like an autumn squirrel and decide how much to store for the future. In November and December, they 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. The IRS just set the qualified plan limits for 2024. That’s crucial info for employees and executives who can participate in company NQDC plans.
How The 2024 IRS Qualified Plan Limits Affect Nonqualified Deferrals
Generally, you defer income via nonqualified plans only when you know you will max out your yearly contributions to qualified plans. Therefore, the contribution limits set by the IRS on qualified plans, adjusted annually for inflation, are important for NQDC planning.
If you’ve already maxed out your qualified plan contributions for 2023, you will probably do the same in 2024, so you will need NQDC plans to defer any salary and bonus increases you expect in 2024. Your motivation to defer may be boosted further if you believe tax increases are on the way and will affect you.
2024 IRS Contribution Limits For Qualified Plans
The IRS changes in limits for 2024 are much smaller than the increases for 2023 because these adjustments are based on the inflation rate, which has moderated. Here are the key annual contribution limits on qualified retirement plans for 2024, along with the 2023 limits for comparison:
Contribution type/limit | 2023 | 2024 |
---|---|---|
Compensation limit in qualified deferral and match calculation | $330,000 | $345,000 |
Elective compensation deferrals, such as 401(k) and 403(b) | $22,500 | $23,000 |
Catchup contribution for people aged 50 or older | $7,500 | $7,500 |
Total defined contribution limit (employee and employer contributions) | $66,000 + catchup contribution |
$69,000 + catchup contribution |
Defined benefit plan payout limit | $265,000 | $275,000 |
Income threshold defining key employees for top-heavy plans and six-month delay on payout upon separation | $215,000 | $220,000 |
Income threshold defining highly compensated employees for nondiscrimination testing; this also applies to income point where companies can exclude employees from a tax-qualified ESPP | $150,000 | $155,000 |
Qualified Versus Nonqualified Retirement Plans
The yearly contribution limits for qualified retirement plans are a big reason why companies offer nonqualified plans: to let executives and other highly compensated employees save extra money for retirement with an elective nonqualified plan or an excess 401(k) plan. The deferred income is “nonqualified” because it does not fit the rules in the tax code that allow tax-qualified plans, such as 401(k) and 403(b) plans.
Nonqualified deferred comp allows you to put away amounts beyond the permissible contribution amounts of standard qualified retirement plans. For retirement planning, it can therefore bridge the considerable gap that arises between the amount of income that you will actually need in retirement and the amount of income that can be provided via your 401(k) plans and Social Security.
Nonqualified Deferrals Have Complex Rules
Nonqualified deferred compensation plans and their participants must follow the complex rules under Section 409A of the US tax code. These rules govern your deferral and distribution elections. The amounts that you defer can only be informally funded by your company, and they are at risk should the company enter bankruptcy proceedings.
The website myNQDC.com is a comprehensive resource on NQDC plans, including the basics, the deferral/distribution process, the risks, and the related financial and tax planning.
Social Security Wage Cap Also Rises In 2024
Set by the Social Security Administration, the Social Security wage cap will rise to $168,600 in 2024, up from $160,200 in 2023.
With the 6.2% rate of Social Security tax, the maximum possible Social Security withholding is $9,932.40 in 2023 and will rise to $10,453.20 in 2024.
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.
Further Resources
For a table comparing the features of 401(k) plans and NQDC plans, and their relative advantages and disadvantages, see an FAQ at myNQDC.com. See also the website’s FAQ on the top NQDC-related issues in year-end planning.
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