Alert: 2023 IRS Qualified Plan Limits Affect NQDC Participants
For 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, many executives and key employees who 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. The IRS just set the qualified plan limits for 2023.
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.
Given the current inflation, the IRS changes in limits from 2022 to 2023 are much larger than they have been in recent years. However, if you’ve already maxed out your qualified plan contributions for 2022, you will still probably do the same in 2023, so you will need NQDC plans to defer any salary and bonus increases you expect in 2023. Also, if you believe tax increases are on the way and will affect you, you may feel a growing need to defer income.
| Contribution type/limit
|
2022
|
2023
|
|---|---|---|
| Compensation allowed in qualified deferral and match calculation
|
$305,000 | $330,000 |
| Elective compensation deferrals
|
$20,500 | $22,500 |
| Catchup contributions for people aged 50 or older
|
$6,500 | $7,500 |
| Total defined contribution limits (employee and employer contributions)
|
$61,000 + catchup contribution |
$66,000 + catchup contribution |
| Defined benefit plan payout limits
|
$245,000 | $265,000 |
| Income threshold defining key employees for the purposes of top-heavy plans and the six-month delay on payout upon separation
|
$200,000 | $215,000 |
| 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 | $135,000 | $150,000 |
Set by the Social Security Administration, the Social Security wage cap will rise in 2023 to $160,200, up from $147,000 in 2022. With the 6.2% rate of Social Security tax, the maximum possible Social Security withholding is $9,114 in 2022 and will rise to $9,932.40 in 2023. 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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