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"Unlinking" a wrap plan from a 401(k) plan


Guest gaham

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Guest gaham

I have a question regarding the handling of a nonqualified wrap plan linked to a 401(k) plan. The current design calls for irrevocable deferrals into the nonqualified plan with a "pour over" at the end of the year into the 401(k) of the maximum amount possible. Because of the screwy 409A guidance that limits the amounts deferred under the nonqualified plan to the 402(g) limits, we want to "delink" the plans. Basically the thought would be to prohibit anyone who defers into the nonqualified plan for a year from making any change in his deferral election under the 401(k). However, I am concerned about the rule in the new 401(k) regs. that says that participants must have an effective opportunity to make (or change) an election at least once during each plan year. See Reg. Sec. 1.401(k)-1(e)(2)(ii). I think an argument can be made that those who elect to defer under the nonqualified plan voluntarily waive their right to make any change to the 401(k) deferral election for the upcoming year and this is not a violation of that rule. In effect, it is a voluntary choice made by the participant. Does anyone know whether the IRS has any viewpoint on this? Or does anyone have a better idea?

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Could you provide the basis for your statement that the amount deferred under the wrap NQDC must be limited to the 402(g) limit.

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Guest gaham

Prop. Reg. Sec. 1.409A-2(a)(8). Also, look at the preamble to those regs at Section IX.

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Example 12 which is referred to in reg 2(a)(8) does not limit the amount that can be deferred under the NQ plan to the amount allowed under 402(g) since the employee "defers a specified percentage of his pay for the subsequent calendar year". The example states that under the terms of the NQ plan and the 401k plan the employee's deferral under the NQ plan is reduced by the amount transferred to the 401k plan (which is the maximum amount that may be deferred under the 401k plan not in excess of the amount specified under 402(g) for the plan year) as soon as administratively practible following the end of the year in which the salary is earned. The limitation on transfers to the maximum amount that can be electively deferred under the 401k plan is intended to prevent transfers to the 401k plan that would be returned to the employee as excess contributions.

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