wrap around plans under final regulations

[k man]

does anyone know if wrap around plans are still alive under the final regulations. cant seem to find a mention of them and they were mentioned in an example in the proposed regulations.

[Guest LeeNunn]

does anyone know if wrap around plans are still alive under the final regulations. cant seem to find a mention of them and they were mentioned in an example in the proposed regulations.

1.409A-2(a)(9) covers this. Treasury removed example 12 from the proposed regs because of the concern that taxpayers might read too much into the example. Treasury didn't want to imply that the contingent benefit rules of 401(k) and ERISA weren't concerns. In summary, you can still do these plans, but you should think twice because of issues that have nothing to do with 409A.

[Guest mjb]

what are the contingent benefit rules of 401k that are an issue?

[Steelerfan]

I don't know about the contingent benefit rules, but my experience in trying to redesign wrap around plans in accordance with 409A is one of frustration. The limitations 409A places on changing deferral elections for the year prevents the kind of flexibility you want participants to have to maximize the benefits of the 401(k), while also trying to mazimize nonqualified benefits. In short, because of the "guesswork" that may be involved in maximizing qualifed plan benefits for the year, it seems better to me to separate the plans; you don't want the "lock in" requirements of 409A to force a participant to either max out too fast or undercontibute to the 401(k).

[k man]

LeeNunn, thanks for the information. i think they are workable as long as the rules are clearly explained. i agree 409A complicates things somewhat. were the treasury concerns printed anywhere? i would like to see that in black and white.

[Steelerfan]

The contingent benefit rules were a problem pre 409A, so I don't see why they would be any more of a problem now--it's only worse because of 409A.

The 401(k) regulations say that participation in a nonqualified [401(k)] plan-or other benefit--may not be conditioned on the employee making or not making an election under the 401(k) plan. Oddly enough it seems that the main planning issues presented by the contingent benefit rule and 409A originate from the same issue-the need for enough flexibility to "fill up" the qualified plan first.

Certainly 409A throws a huge monkey wrench by providing less flexibility to work within the confines of the contingent benefit rule.

[Guest mjb]

Where do the 401k regs say that?

[Steelerfan]

Where do the 401k regs say that?

Reg § 1.401(k)-1(e)(6)(i)

Under this requirement, a 401(k) "plan" must provide that no “other benefit” is conditioned (directly or indirectly) on the employee's electing to make (or not to make) elective contributions under the CODA. This rule reflects the Code Sec. 401(k)(4)(A) prohibition on having benefits (other than a match) conditioned on making or not making an elective contribution.

[Guest mjb]

Under 1.401(k)-1(e)(6)(iii) any benefit under an excess benefit plan described in 3(36) of ERISA that is dependent on the employee electing to make or not make elective contributions is not treated as contingent. Deferred compensation under a nonqualified plan of deferred compensation that is dependent on an employees' having made the maximum elective deferrals under 402(g) or the maximum elective contributions permitted under the plan is also not treated as contingent.

Under 1.401(k)-1(a)(5)(iv) cash or deferred plan will not fail to qualify merely because it includes anonqualified cash or deferred arrangement.

[Steelerfan]

It's not that you can't do it, you just have to do it right. There are a few rulings where the IRS poo poos the arrangements as contingent.