Does 401(a)(17) Include Nonqualified Deferrals?

[Guest wwest]

What is the "compensation" in 401(a)(17) (currently $160,00 limit for ADP testing)? The regulations do not seem to define "compensation" as well as 415©(3) or 414(s) does. Are nonqualified deferrals included in the 401(a)(17) limit?

[david rigby]

Usually non-qualified deferrals are not compensation because they are not taxable. My understanding is that amounts deferred in a non-qualified plan are not permitted to be included in the definition or benefit determination of a qualified plan.

Simply, different kinds of money.

[Guest]

401(a)(17) limits the amount of compensation you can take into account in determining benefits and contributions under a qualified plan. If your benefit/contribution formula includes deferrals to a NQ plan as compensation, you would include these amounts with any other compensation taken into account to determine benefits/contributions. The sum of these components can't exceed $160,000.

There is no per se prohibition on basing benefits/contributions on compensation deferred into a NQ plan. Neverthless, it makes 415 compliance tricky (contributions to a NQ plan are not counted as compensation for 415 purposes) and it makes passing 401(a)(4) testing difficult (your testing compensation probably can't include these amounts -- they are not reported on the W-2 and it is unlikely that a definition including NQ plan deferrals would pass 414(s)).

[Guest Cal]

Isn't is possible though to use a df of compensation which includes deferred comp. under a NQP for purposes of computing plan benefits and use a different df of compensation (not incuding deferred compensation) for 414(s) and discrim. testing purposes? I assume same answer in the context of a DB plan.

[Guest]

Yes, it is. But deferrals to a nonqualified plan can only be made by top hat employees (who will just about always be HCEs under any reasonable definition of "top hat"). Your 414(s) or testing compensation will not include these amounts. Thus, everything else being equal, your allocation rates for HCEs will be higher than NHCEs. You'll need to get into some more spohisticated 401(a)(4) planning at that point . . .