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Wrap-around plan 401(k)/non-qualified


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With regard to "wrap around" plans (ie. non-qualified plan working with a 401(k) arrangment), there are a couple of PLR's out there that state that a participant must make his deferral election by December 31 of the prior plan year in order to "satisfy the 401(k) cash availability rules."

what would happen if a person decided to enter the non qualified plan in the middle of the plan year without making the prior year election?

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I think it would cause constructive receipt problems, rather than anything under 401(k). The IRS would say that the election to defer wasn't made before the beginning of the period in which the services are to be performed.

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01 If the plan provides for an election to defer payment of compensation, such election must be made before the beginning of the period of service for which the compensation is payable, regardless of the existence in the plan of forfeiture provisions.

with regard to the above, could the participant make the case that he earns compensation on a payroll by payroll basis and as such an election to defer would be valid with respect to the compensation not yet earned (e.g. x earns 100K per year; makes the election on July 1 and thus can only defer 50K)

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Guest TWN1344

The nonqualified plan document should state when the "open window(s)" of enrollment occur for the eligible persons. The person couldn't just arbitrarily decide to begin participating on his/her own if they missed the stated open windows.

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I am not as concerned what the plan document says as it can be amended. The participants would not arbitrarily be deciding to participate. the plan would be made available to them for the first time in the middle of the year.

After further review, I think that Rev. Proc. 92-65 sets forth a specific exception to the "constructive receipt" rule. The procedure provides that an election to participate must be made prior to the beginning of the plan year unless, "in the first year in which a participant becomes eligible to partipate, the newly eligible participant may make an election to defer compensation for services to be performed subsequent to the election within 30 days after the date the employee becomes eligible."

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Guest TWN1344

If your premise was that a person first became eligible during the middle of theyear, then it wasn't clear in your original question.

I inferred from your original question that the person was ALREADY eligible, but chose not to participate during the annual "end-of-year" enrollment window (12-31 deadline), and then changed his/her mind midway through the following year. This would be a no-no.

As for persons who first become eligilble during the course of a caldendar year, what you stated is correct and is the way NQ plans operate (assuming the document allows for this special open window).

Once one is eligible beyond the first year, the annual election must be made by 12/31 of the year preceding the deferrals.

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