401(k) Alternatives for Highly Compensated Employees: 2026 Limits, Refunds and NQDC
401k alternatives for highly compensated employees: the 2026 HCE limits, why failed ADP tests trigger refunds, and how an NQDC plan restores lost savings.
The main 401(k) alternative for highly compensated employees is a non-qualified deferred compensation (NQDC) plan, which lets eligible executives defer pay beyond the 2026 401(k) limit of $24,500 and can restore matches lost to the $360,000 compensation cap. It also gives them somewhere to save when a failed ADP test sends part of their 401(k) contributions back as refunds.
Your highly compensated employees (HCEs) run into qualified-plan limits from several directions at once: the dollar cap on deferrals, the cap on compensation that counts for the match, and nondiscrimination testing that can claw back what they did contribute. This guide sets out the 2026 limits, explains why refunds happen and why they frustrate HCEs, and shows how an NQDC plan fills the gap. For a side-by-side of the two plan types, see NQDC vs. 401(k).
The 2026 limits that cap HCE retirement savings
These are the 2026 figures from IRS Notice 2025-67. The 2027 limits have not been published yet; the IRS is expected to announce them in November, and this page will be updated then.
| Limit (2026) | Amount | Change from 2025 | Why it matters for HCEs |
|---|---|---|---|
| 402(g) elective deferral limit | $24,500 | Up from $23,500 | The most an employee can defer into the 401(k), before catch-ups |
| 415(c) annual additions limit | $72,000 | Up from $70,000 | Caps employee plus employer contributions to the 401(k) |
| 401(a)(17) compensation limit | $360,000 | Up from $350,000 | Pay above this cannot count toward the 401(k) match |
| 414(q) HCE compensation threshold | $160,000 | Unchanged | Pay above this generally makes an employee an HCE for testing |
| Age 50+ catch-up | $8,000 | — | Additional deferral for older employees |
| Age 60 to 63 catch-up | $11,250 | Unchanged | Higher catch-up for those ages |
| Roth catch-up wage threshold | $150,000 of 2025 FICA wages | — | Employees above it must make 2026 catch-ups as Roth |
| 416(i) key-employee officer threshold | $235,000 | — | Used in top-heavy testing |
There is no separate 401(k) deferral limit for HCEs. They face the same $24,500 cap as everyone else, but testing can reduce what they actually keep in the plan, and the compensation cap shrinks their match as a share of pay. Your recordkeeper or plan administrator determines who counts as an HCE, including through ownership.
When the 2027 limits arrive, update your NQDC enrollment materials, any NQDC formulas that reference the 402(g) or 401(a)(17) limits, restoration-match calculations and the HCE threshold used in testing. The NQDC open enrollment timeline shows where that fits in the Q4 calendar.
Why HCEs get 401(k) refunds
A traditional 401(k) must pass the ADP test each year. According to the IRS 401(k) Fix-It Guide, the plan passes when the HCEs' average deferral percentage does not exceed the greater of:
- 125% of the non-HCE average, or
- the lesser of 200% of the non-HCE average and the non-HCE average plus 2 percentage points.
A simplified, illustrative example
Assume your non-HCEs defer an average of 4% of pay. The HCE average can be no higher than the greater of 5% (125% of 4%) and 6% (the lesser of 8% and 6%), so 6%. An executive earning $300,000 who defers the full $24,500 is deferring about 8.2% of pay. If your HCEs as a group average well above 6%, the test fails. The real test averages each person's individual percentage, so treat this only as a picture of how the ceiling works.
Failed tests are commonly corrected by refunding excess contributions to HCEs or by making qualified nonelective contributions (QNECs) for non-HCEs. Corrections are time-sensitive, and the Fix-It Guide sets out the deadlines and consequences.
This is not a rare problem. In the 2024 Newport/PLANSPONSOR NQDC survey of 268 plan sponsors, 15% of businesses had seen 401(k) or equivalent contributions returned to executives in the past three years.
Why refunds frustrate HCEs
From the executive's side, a refund feels like a penalty for saving:
- They did what they were told. They maxed out their 401(k), then learned months later that part of it was coming back.
- The refund is generally taxable, so money they meant to shelter shows up as income, often when they had not planned for it.
- The savings opportunity is gone. They cannot go back and put that money into the 401(k) for that year.
- It can repeat. Without a design change, the same thing can happen every year, and HCEs may start deferring less to avoid it.
Each refund also generates questions for your benefits team, and the frustration lands on the benefit you are paying to provide.
How an NQDC plan captures what the 401(k) cannot
An NQDC plan has no IRS dollar limit on deferrals, so HCEs can elect to defer salary and bonus beyond the 401(k) cap. In the simplest design, they elect each fall, before the 409A deadline, to defer an amount sized to the savings they cannot get into the 401(k). Their own 409A deferral election rules apply: elections for next year's salary generally must be made by December 31.
Some plans go further and link NQDC deferrals to the 401(k). Under Treas. Reg. 1.409A-2(a)(9), changes in NQDC deferrals that result from a participant's elective-deferral actions in the qualified plan are not treated as new deferral elections, but only as long as the total adjustments do not exceed the 402(g) limit ($24,500 for 2026). That rule is both the basis for designs that shift amounts into the NQDC plan when 401(k) deferrals are refunded or capped, and the limit on them. These linked designs are technical, and their mechanics should be set by counsel and your recordkeeper.
Restoring the match lost to the 401(a)(17) cap
The compensation limit quietly cuts the match for your highest earners. Here is an illustration with assumed figures: a 401(k) that matches 100% of the first 5% of pay, and an executive earning $500,000 in 2026.
| Match if all pay counted | Match under the 2026 $360,000 cap | |
|---|---|---|
| Eligible compensation | $500,000 | $360,000 |
| 5% match | $25,000 | $18,000 |
| Shortfall | $7,000 a year |
A second effect depends on how your 401(k) defines compensation. If it excludes pay deferred into the NQDC plan, an executive earning $400,000 who defers 20% of salary to the NQDC plan has $320,000 of 401(k) pay, and the 5% match falls to $16,000.
A restoration match credits the difference in the NQDC plan. PSCA's 2024 survey reportedly found that 80% of employers contribute to their NQDC plan and half of those make a restoration match, as covered by NAPA in February 2025. For design options, see the deferred compensation employer match guide and SERP vs. NQDC vs. restoration plans.
Who should be eligible: the HCE threshold vs. the top-hat test
It is tempting to make everyone above the $160,000 HCE threshold eligible for the NQDC plan, since those are the employees who get refunds. But the two tests are not the same. An NQDC plan avoids most of ERISA's participation, vesting, funding and fiduciary rules only if it is unfunded and maintained primarily for "a select group of management or highly compensated employees" (29 U.S.C. 1101). A DOL advisory council report notes that Congress expected that exemption to apply narrowly.
Being an HCE for 401(k) testing does not, by itself, settle whether an employee belongs in a top-hat group. Set your eligibility line with counsel, and note that top-hat plans using the DOL's alternative reporting method must file their top-hat statement electronically.
Making the NQDC option usable for your HCEs
Once an HCE is capped, the real question changes from "should I max out my 401(k)?" to "how much should I defer outside it, and how should it be paid?" That decision involves tax rates now and at payout, payout schedules, possible state moves and the risk that comes with being an unsecured creditor. It is hard to answer from a plan summary.
Offering a private modeling tool to everyone eligible for your NQDC plan addresses that gap. With a license for your plan, each eligible employee can model their own election, with your deferral limits, payout options and employer credits set as starting values configured with you. They see federal and state tax for both paths every year, and you never see individual inputs, results or elections. The tool explains outcomes; it does not recommend an election.
The business case
Every item below is a qualitative framework, not measured data:
- Avoided refund frustration. Executives who know they can save in the NQDC plan have somewhere to put money the 401(k) cannot take.
- Better use of a benefit you already pay for. Administration costs are largely fixed; more informed participation gets more value from them.
- Fewer one-off questions. Refund season and enrollment season both generate individual questions your team should not answer as advice.
- Appreciation of the benefit. A plan an executive understands is a plan they value.
Your plan documents govern eligibility, deferrals and credits, so involve counsel and your recordkeeper or advisers before you change anything. For the participant-side math, point employees to how much to defer.
Frequently asked questions
What is the highly compensated employee threshold for 2026?
The 414(q) compensation threshold for 2026 is $160,000, unchanged from 2025, per IRS Notice 2025-67. Ownership can also make an employee an HCE, and your recordkeeper or plan administrator applies the full definition.
Is there a different 401(k) limit for highly compensated employees in 2026?
No. The 2026 elective deferral limit is $24,500 for everyone, plus catch-ups for those eligible. HCEs can end up keeping less than that because a failed ADP test may require refunds, and the $360,000 compensation limit caps the pay that counts toward their match.
Why do highly compensated employees get 401(k) refunds?
When HCEs as a group defer too much relative to non-HCEs, the plan fails the ADP test. The IRS Fix-It Guide notes that failed tests are commonly corrected by refunding excess contributions to HCEs or by making QNECs for non-HCEs. The refund is generally taxable to the employee.
Can an NQDC plan make up for a 401(k) refund?
It can give HCEs another place to defer. Some plans link NQDC deferrals to 401(k) activity, which 409A permits only as long as total adjustments do not exceed the 402(g) limit. The design details belong with counsel and your recordkeeper.
When will the 2027 401(k) and HCE limits be announced?
The IRS is expected to publish the 2027 limits in November 2026. Until then, use the 2026 figures and plan to update enrollment materials, NQDC formulas and restoration-match calculations once the new numbers are out.