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It can be the amount necessary to cover taxes, but can't exceed the amount of Federal, State, local, and foreign taxes required to be withheld in connection with vesting. Treas. Reg. 1.409A-3(j)(4)(iv). EBECatty raises some very good points, but the design does make it look a lot more like a retirement plan, e.g. if the plan provides for a 10- or 15-year payout, in approximately level amounts, following separation from service. Income tax on all the earnings is deferred, no more FICA is owed, and most of the payments (e.g., over the 10- or 15-year period) are tax-free recovery of basis. For a senior executive and board who want a real retirement benefit, it's a good design. The biggest issue is the creditworthiness of the 501(c)(3), so makes the most sense for a well-established employer. And finally, explaining how it works makes for an interesting PowerPoint presentation, if you're into that.

That is not necessarily a universally held opinion. The other point of view would be that the employer, i.e. the controlled group, has already adopted the plan, and while it may take the form of a participating employer agreement, it is really an amendment to allow a previously-excluded class to participate. That said, I don't think there is a problem with amending a safe harbor plan to bring in a class of previously-excluded employees mid-year, and I agree it would be advisable to do it before 10/1 to cover yourself under either interpretation.