November and December are the months when many NQDC plan participants must choose how much of next year’s salary to defer. Influencing this decision about nonqualified plans are the contribution and benefit limits that apply to qualified retirement plans. Importantly, the contribution limits of qualified plans form 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. (See also our FAQ on the top year-end-planning issues, which may change in upcoming years with a new president and the possibility of tax reform.)
The contribution limits for qualified plans are provided under Section 415 of the Internal Revenue Code, and every autumn the IRS announces figures for the following year. The limits are adjusted annually for inflation. While there are slight increases in some limits for 2018, in others the 2017 figures continue.
What this means: The changes in limits from 2017 to 2018 are slight. If you have already maxed out your qualified plan contributions for 2017, you will probably do the same in 2018, so you will need to rely on NQDC plans to defer any salary and bonus increases you expect in 2018.
The table below presents the qualified plan limits for 2017 and for 2018 (increases marked in red). See also the IRS release announcing the 2018 figures.
Qualified Plan Contributions: Annual Limits That Affect NQDC Plans
|Compensation allowed in qualified deferral and match calculation||$270,000||$275,000|
|Elective compensation deferrals||$18,000||$18,500|
|Catchup contributions for people aged 50 or older||$6,000||$6,000|
|Total defined contribution limits (employee and employer contributions)||$54,000 + catchup contribution||$55,000 + catchup contribution|
|Defined benefit plan payout limits||$215,000||$220,000|
|Income threshold defining key employees for the purposes of top-heavy plans and the six-month delay on payout upon separation||$175,000||$175,000|
|Income threshold defining highly compensated employees for the purposes of nondiscrimination testing||$120,000||$120,000|
Set by the Social Security Administration, the Social Security wage cap will rise in 2018 to $128,700, a slight increase from $127,200 in 2017. With the 6.2% rate of Social Security tax, the maximum possible Social Security withholding in 2018 is $7,979.40.
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.
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