Wrap around arrangement and catch up contributions

[Guest dietpepsi]

A new client has brought to us a 401(k) plan. They have a nonqualified plan and have been utilizing a wrap around arrangment, meaning the ADP/ACP test is calculated and then amounts are transferred from the nonqualified plan to the qualified plan as long as the test still passes.

My first issues is that the 401(k) plan is a 7/1 plan year. All PLR's refer to a 1/1 plan year so already I think this pretty risky. Any thoughts? They may have had an ERISA attorney help them set this up, and I hope they did, but I am not sure.

My second issue is with catch up contributions. Two of the highly compensated employees are age 50. All the PLR's were issued prior to catch up contributions being allowed. I have calculated the ADP/ACP and have determined how much each HC can bring to the nonqualified plan and the ADP/ACP will still pass. They want to know if they can bring over additional amounts for age 50 catch up. Due to the way refunds are levelized, I have no way of knowing how to calculate the ADP/ACP test so that only certain HC's over age 50 get a refund that could be recharacterized as age 50 catch up. Is anybody in the industry doing this? Is there any software available? Or should the catch up just not be considered at all? Or could it simply be transferred above and beyond what I have calculated? For example, I know each HC can bring over 5% to the 401(k) plan and the ADP/ACP will pass. Can they also now bring over their age 50 catch up?

Thoughts or questions?

Thanks!

[Dan]

As to your question about catch-ups, you can use the catch-up provisions for these 2 HCE's if they deferred the highest dollar in the HCE group, given the leveling method of refunds. If their current deferral dollar amounts are not already the highest in the HCE group, then they probably can't use the catch-up. If they have the highest dollar amounts, then you can add a sufficient amount to utilize the catch-up in the 401(k) plan.

As for the plan year, I don't recall hearing about any restrictions to the calendar year. As to the rest, look at the 409A regulations, starting with IRS Notice 2005-1.

Hopefully they should have used a a competent attorney to set up the wrap plan. The 20% penalty could get really expensive if its fouled up. As I understand it, the IRS hopes these HCEs do foul up the plan. Few will cry that HCEs have to pay extra taxes.

[buckaroo]

As to your question about catch-ups, you can use the catch-up provisions for these 2 HCE's if they deferred the highest dollar in the HCE group, given the leveling method of refunds. If their current deferral dollar amounts are not already the highest in the HCE group, then they probably can't use the catch-up. If they have the highest dollar amounts, then you can add a sufficient amount to utilize the catch-up in the 401(k) plan.

I have just received my first inquiry into the wrap plan arrangement with a NQDC and 401(k) plans. I saw this post and I want to make sure that I understand it. I am under the impression that the above related to leveling method and CUC sounds logical. However, I read in EOB the following:

Chapter 16 - Other Employer-Sponsored Deferred Compensation Plans, Section IV, Part D, Tandem (or “wrap”) arrangements between nonqualified plans and 401(k) plans:

5.“Catch-up” contributions. IRC §414(v), as added by EGTRRA §631, allows a 401(k) plan to offer a “catch-up” contribution option to participants who have reached age 50 by the end of the calendar year. The catch-up contribution is in addition to the dollar limit under IRC §401(a)(30) and is not taken into account in applying the IRC §415 limits to other contributions made on the participant’s behalf to the plan. The tandem arrangement described above is permitted to be structured to accommodate the catch-up contribution option in the 401(k) plan. The total contribution should be initially deferred into the nonqualified arrangement, as shown in the above example. However, the amount transmitted from the nonqualified plan to the 401(k) plan after the close of the year would include not only the maximum amount that can be deferred without violating the ADP test, but also the catch-up contributions that are allowed above the “ADP limit" under the plan. The ADP limit is the maximum amount of elective deferrals permitted under the corrective distribution method under IRC §401(k)(8)©. See Treas. Reg. §1.414(v)-1(b)(1)(iii). To illustrate, consider the example in 1. above. Suppose the catch-up limit in effect for 2010 is $6,000. If Peter is over age 50, a catch-up contribution could be added to $14,200 to arrive at a permissible deferral amount to the 401(k) plan of $20,200. In addition, the total amount that Peter would defer for 2010 under the nonqualified plan might be greater to take into account that the catch-up contribution would be added to the permissible deferral amount under the 401(k) plan.

Does this state that the CUC is allowable over the ADP% regardless of the leveling?

Responses are greatly appreciated.