Like squirrels allocating their fall acorns, in November and December many NQDC plan participants must choose how much of next year’s salary to defer. Influencing this decision about nonqualified plans are the IRS contribution and benefit limits that apply to qualified retirement plans. Yesterday the IRS set these limits for 2019.
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 NQDC-related year-end-planning issues, including the impacts of the tax reform that took effect in 2018.)
What The IRS Announced
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 2019, in others the 2018 figures continue.
What this means: The changes in limits from 2018 to 2019 are slight. If you have already maxed out your qualified plan contributions for 2018, you will probably do the same in 2019, so you will need to rely on NQDC plans to defer any salary and bonus increases you expect in 2019.
The table below presents the qualified plan limits for 2018 and for 2019 (increases marked in red). See also the IRS release announcing the 2019 figures.
Qualified Plan Contributions: Annual Limits That Affect NQDC Plans
|Compensation in qualified deferral and match calculation||$275,000||$280,000|
|Elective compensation deferrals||$18,500||$19,000|
|Catchup contributions age 50+||$6,000||$6,000|
|Total defined contribution limits (employee + employer)||$55,000 + catchup contribution||$56,000 + catchup contribution|
|Defined benefit plan payout limits||$220,000||$225,000|
|Income threshold for key employees in top-heavy plans and six-month payout delay on separation||$175,000||$180,000|
|Income threshold for highly compensated employees in nondiscrimination testing||$120,000||$125,000|
Set by the Social Security Administration, the Social Security wage cap will rise in 2019 to $132,900, a slight increase from $128,400 in 2018. With the 6.2% rate of Social Security tax, the maximum possible Social Security withholding is $7,979.40 in 2018 and will rise to $8,239.80 in 2019. 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.
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Concerned about the security of your NQDC contributions? Because payouts are not guaranteed (subject to general unsecured creditors), it is important to protect large balances against the risk of bankruptcy or insolvency. The IRS allows participants to protect their retirement savings. Learn about the Deferred Compensation Protection Trust. While myNQDC is not endorsing any product or approach, you may want to explore it to determine whether the trust is a good fit for your financial needs and concerns.
The Editorial Team