401k and Deferred Compensation Plan for Select Employees

[Guest Louis Gray]

When a company has Both both a 401k and a Non-Qualified Deferred Compensation Plan for Select Employees and both are pre-tax Plans, how are the percentages calculated from the employees gross earings.

I was told that the Deferred Cmpensation calculation takes precedence over the 401k calculation. The primary retirement account is the NQ Deferred comp and is calculated in full against Gross Earnings. The 401k calculation becomes a secondary adjusted calculation. The 401k calculation would calculate the percentage based on the Gross earnings "less" the Deferred Compensation amount.

I would appreciate knowing if this is correct and how to do it based on say a $250,000. annual salary since I am going to have to communicate this to the eligible employees so they can figure the amount of compensation they can contribute. We currently have a 15 percent maximum compensation that employees can contribute to both plans combined.

Thanks,

Louis Gray

[Jon Chambers]

There is no standard approach--it depends on how your plans are drafted. What you describe makes sense, and is a relatively straightforward structure. Contributions to the deferred comp plan are no longer "compensation" and consequently aren't eligible to be contributed to the 401(k) plan.

Many other deferred compensation plans don't kick in until after the 401(k) limit has been reached--either a % of pay, or the $10,500 402(g) limit.

Be careful with your $250,000 example. Remember that in 2001, qualified plans can't consider comp in excess of $170,000.

You are right to be sure you communicate the plans properly. I suggest referring specific questions to the people that helped draft your plans in the first place.