It’s this time every year, late April, when a proverbial sigh can be heard around the country marking the end of tax season. Taxes weren’t top of mind for many workers at the onset of their careers. Rather, landing a first job was a moment of excitement and pride, and the feeling of independence that came with earning that first paycheck was unmatched.
Whether the job was a part-time gig at a local store, an internship in a small office, or an entry-level role in a larger organization, earning a first paycheck can feel like the start of something big. The anticipation of learning new skills, meeting new people, and stepping into the world of work can make every task feel significant. In many ways that first paycheck, while modest, was more than just money—it symbolized hard work, a sense of achievement, and the start of a journey toward greater opportunities.
Fast forward to today, the thrill of that first paycheck may have been replaced by more significant financial milestones, but with more income comes more responsibility. Finding ways to reduce one’s income tax burden can feel like trying to hit a moving target – especially when having to account for bonuses, equity grants, and other complex compensation structures – but one of the most effective ways an employee can reduce his or her tax burden is by reducing the amount of income subject to current income taxes. In most cases, this means deferring compensation into an employer-sponsored savings plan.
Most employees utilize 401(k) plans, but for highly compensated employees, the most significant opportunity to reduce an annual tax burden exists through a nonqualified deferred compensation plan (NQDCP). The IRS does not impose contribution or company match limitations on NQDCPs like it does for 401(k) plans; 401(k) contribution limits for 2025 are $23,500 for those under 50 and $31,000 for those 50 and older.
While NQDCPs offer eligible employees an excellent tax-deferred savings opportunity, they come with three significant considerations: 1) creditor risk, meaning that a participant becomes an unsecured creditor of their employer in the event of the employer’s bankruptcy and the participant’s deferred compensation could be lost, 2) the requirement to make deferral elections before the year in which an employee earns the salary or bonus they are choosing to defer, and 3) the requirement to make distribution elections in advance, at the same time the compensation is deferred. But, NQDCPs also come with significant distribution flexibility, with many plans offering the option to receive in-service distributions, meaning the deferred compensation is not required to remain in the account until a certain age, or until retirement.
Because of this flexibility, prudent NQDCP participants will be paying close attention to the political landscape because the biggest tax break in over 30 years is set to expire on December 31, 2025. The Tax Cuts and Jobs Act (TCJA) was signed into law in 2018 and, at its onset, the law reduced the individual tax rate for 5 of the 7 income tax brackets and extended the income limit for each bracket[i].
Since the TCJA is set to expire at the end of 2025, it may be prudent for employees who have been benefitting from the legislation to consider how they can continue to enjoy the benefit of lower taxation. However, it is impossible to know if the TCJA will be extended and, if so, to what extent. Therefore, employees can consider year-to-year tax changes and create assumptions about how they will be taxed in future years.
Tax savvy retirement savings account holders and NQDCP participants may use a few different strategies to make the most of their deferral benefits. A popular option would be to defer income into a 401(k) and if the contribution limit is reached, then to defer additional income into an NQDCP retirement account; this would allow the employee to defer as much as they’d like and potentially earn investment gains on their deferrals until they opt to receive distributions from their accounts in retirement.
Outlined below are 2026 tax brackets if the TCJA were to continue as compared to if it expired, according to Congressional Budget Office data.[ii] As the chart shows, there could be significant changes in certain brackets in 2026. Savvy savers should take note and look to optimize their tax planning and investment strategies.
Karr Barth’s administrative systems allow our clients to implement plans with the maximum flexibility allowed under current regulations and make it easy for participants to manage their accounts. To learn more about the benefits of NQDCPs or the services provided by Karr Barth Administrators, visit Kbadmin.com or contact us at (800) 549-1989 or planadmin@kbadmin.com.
Karr Barth Administrators does not provide tax or legal advice. Employers (and other service recipients) should consult their own tax and legal advisors before establishing a nonqualified deferred compensation plan, and regarding any potential legal, tax, and other consequences of any investments or other transactions made with respect to a nonqualified deferred compensation plan. Eligible employees (and other eligible service providers) should consult their own tax and financial professionals before deciding to participate in, or making any elections with respect to, a nonqualified deferred compensation plan.
[i] United States Congress. H.R.1 - An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018. December 22, 2017. Retrieved from: https://www.congress.gov/bill/115th-congress/house-bill/1/text
[ii] Congressional Budget Office: “Tax Parameters and Effective Marginal Tax Rates” Jan. 2025. Tax Foundation.