Determining transfer amount in tandem(wrap) 401(k)/nonqual arrangement

[Guest GMedley]

We have a client who has a Tandem arrangement between a nonqualified Rabbi Trust & a 401(k) Plan. The HCEs are encouraged to contribute to the Nonqualified plan, then at year end, we transfer the amount allowable under the ADP/ACP test into the 401(k) plan.

This has worked fairly well in past years, but now there are several HCEs who do not contribute to the NonQual plan, but contribute large amounts to the 401(k) plan. If, as in the past, we do our initial ADP/ACP test considering contributions made to both plans, & transfer the passing ADP/ACP amounts into the 401(k), then those who didn't participate in the Rabbi will get refunds (instead of just having some contributions remain in the Rabbi).

I'm wondering if we should only transfer amounts in from the Rabbi to the extent that the 401(k) plan will pass the ADP/ACP without refunds. But if we do that, then the HCEs who declined to participate in the Rabbi end up getting significantly more in the 401(k) than those who participate in the Rabbi. This seems unfair to those who do participate in the Rabbi, since the 401(k) plan is the better place to have your money.

The law seems to state that we can only transfer into the 401(k) amounts that do not "violate the ADP test." Yet the ADP test only establishes an average, not an individual maximum per se. What if the transfer amounts are fine for those who are getting the transfer, but force those who don't participate in the Rabbi to get a refund?

Is the plan able to require that HCEs contribute to the Rabbi? Has anyone else been through this? I don't see any guidence in the regulations. Thanks.

Grant