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.)
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 typically adjusted annually for inflation. However, no cost-of-living increase has been detected by the US government during the past year. Consequently, in 2016 the limits for contributions to qualified plans are the same as in 2015. (See the IRS release announcing the figures for 2016.)
What this means: If you have already maxed out your qualified-plan contributions, you will need to rely on NQDC plans to defer any salary increases you expect in 2016.
|Compensation allowed in qualified deferral and match calculation||$265,000||$265,000|
|Elective compensation deferrals||$18,000||$18,000|
|Catchup contributions for people aged 50 or older||$6,000||$6,000|
|Total defined contribution limits (employee and employer contributions)||$53,000 + catchup contribution||$53,000 + catchup contribution|
|Defined benefit plan payout limits||$210,000||$210,000|
|Income threshold defining key employees for the purposes of top-heavy plans and the six-month delay on payout upon separation||$170,000||$170,000|
|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 also has not been increased for 2016 and remains at $118,500. With the 6.2% rate of Social Security tax, the maximum possible Social Security withholding in 2016 is $7,347.
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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