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Alert: 2021 IRS Qualified Retirement Plan Limits Affect NQDC Participants

In November and December, many executives and key employees eligible to participate in nonqualified deferred compensation (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 (and this year, also the outlook for future tax rates after the 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. Depending on the election results, there also may be higher tax rates next year, increasing the need to defer income.

Contribution type/limit 2020 2021
Comp allowed in qualified deferral and match calculation $285,000 $290,000
Elective comp deferrals $19,500 $19,500
Catchup contributions for people 50+ $6,500 $6,500
Total defined contribution limits $57,000 + catchup contribution $58,000 + catchup contribution
Defined benefit plan payout limits $230,000 $230,000
Income threshold defining key employees and six-month delay on payout for separation $185,000 $185,000
Income threshold defining highly compensated employees for nondiscrimination testing $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.

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