Executives can manage bonus money in two tax ways: increasing 401(k) deferral fees before bonus payment (allowing up to $24,500-$35,750 in total in 2026 depending on the year) deferring 35-37% of federal taxes, or using Nonqualified Deferred Compensation and 3 Deferred Compensation plans (NQ3 for December) the past. A $150,000 deferred NQDC bonus in the 37% bracket avoids $55,500 in federal taxes in the year of employment.
Executives approaching Medicare eligibility at 65 must account for additional IRMAA premiums based on a two-year outlook, where the 2026 bonus spike increases 2028 Medicare Part B premiums by $81-$447+ per month depending on income bands, making NQDC premiums more important for managing Gross Modified Adjusted.
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A manager who earns a base salary of $200,000 and a year-end bonus of $150,000 faces a direct tax problem: that bonus falls on top of an already high income, pushing it further into the 35% or 37% federal bracket. Most managers know this. Few people know that there are two different ways to move the money before it is taxed, and the person has a deadline that has passed before the bonus is received.
Most employer 401(k) plans allow mid-year changes to the portion of the voting options. The move is clear: before the bonus pay period, raise the deferral rate high enough to put as much of the bonus as possible into the 401(k), up to the annual limit. After the bonus is canceled, reset the rate to match the regular salary contributions for the rest of the year.
For 2026, the IRS’s discretionary contribution limit is $24,500, and executives age 50 to 59 and 64 or older can increase the contribution by $8,000, bringing the total to $32,500. Executives between the ages of 60 and 63 qualify for SECURE 2.0 super catch-up: $11,250 instead of $8,000, for a combined limit of $35,750.
Read: Data Shows One Trend Boosts America’s Savings and Increases Employment
Many Americans grossly underestimate how much they need to retire and overestimate how much they are prepared for. But the data shows that people with the same habit have more than double the amount of those who do not save.
If the manager put in $10,000 in salary deferrals in December, the remaining $14,500 of the standard room (or up to $25,750 with the maximum holding) can go toward the bonus. Some plans go further, allowing for different deferral options specifically for bonus income, which eliminates the need to reschedule altogether. Check the plan document or ask the plan manager directly.
Deducting $35,750 at the 35% rate saves about $12,500 from that year’s income tax, as the money continues to be compounded within the plan.
A 401(k) plan has a ceiling, and for executives who have access to a Nonqualified Deferred Compensation (NQDC) plan, there is no contribution limit. The $150,000 bonus can be fully deferred. But the deferral election must be made in the year before the bonus is earned, under IRC Section 409A. A director who wants to defer a bonus earned in 2027 must make an election by December 31, 2026.
Many executives miss this deadline or don’t know it exists, and 401(k) adjustments can happen days before the bonus is paid, while NQDC options cannot. The decision made this December controls the next year’s budget.
A $150,000 bonus deferred with an NQDC plan in the 37% bracket avoids $55,500 in federal income tax in the year of deferral. Income is taxed when distributed, but if distributions are timed for retirement years, when income is low, the effective rate of deferred income can be very low.
For executives approaching age 65, the decision to return the bonus meets Medicare costs on a two-year lookback basis. IRMAA rates for 2026 are based on 2024 income, a single filer whose adjusted gross income exceeds $109,000 in 2024 pays $284.10 per month for Medicare Part B in 2026 instead of the usual $202.90. That’s an extra $81.20 a month, or about $974 a year, for the first border crossing. Maximum interest rates are up to $649.20 per month.
An executive who takes a large bonus without deferral in 2026 may find that 2028 Medicare premiums reflect that rate, even though the amount has already declined. NQDC’s deferral elections made this December for 2027 revenue could prevent that outcome after two years.
Before the next bonus payment period, contact the plan administrator and ask if the plan allows for annual deferral rate changes and if there are different bonus deferral options. If so, calculate the remaining annual limit and set the rate accordingly.
If the employer offers an NQDC plan and the December 31 election deadline has not passed, determine how much of next year’s expected bonus will be burned. Elections cannot be reversed once made, so the decision requires a realistic estimate of retirement income and expected tax rates at the time of distribution.
If the bonus year’s combined income will exceed $109,000 (single) or $218,000 (married filing jointly), the IRMAA effect model two years ahead. Only a premium compensation consultant can estimate the cost to Medicare of taking the bonus and deferring it, which can be compared to the cost of the plan’s commitment.
Many Americans grossly underestimate how much they need to retire and overestimate how much they are prepared for. But the data shows that people with one habit have more twice the salvation of those who do not.
And no, it has nothing to do with increasing your income, saving money, cutting coupons, or reducing your lifestyle. It’s much more straightforward (and powerful) than any of that. In fact, it is surprising that many people do not accept this method because of how easy it is.
