Non-qualified plan for non-highly, non-management employees?

[Spencer]

I have a client with a frozen DB plan who would like to set another plan to provide some contributions for a select group of non-highly, non-management employees.

These employees are not members of a specific class of employees by either job description, geographic location or method of compensation. Most are older, but not all. They appear to have been selected arbitrarily. This group is about 30% of their total rank and file employees.

I'm not very familiar with non-qualified plans. Is it possible to give these select employees a contribution?

[MGB]

Because they are nonhighly, the plan must be funded, but it will not be a tax-favored trust (earnings will be taxed). When the participants are vested in their benefits, they are taxed on them, even though they do not have access to the money. Yes, you can do this, but it is not a very efficient way to provide retirement benefits.

[david rigby]

When MGB states "they are taxed on them", don't forget that this includes Social Security tax (to the best of my knowledge). Thus, the EE and ER will be paying the tax.

[Kirk Maldonado]

That plan would also be subject to the full extent of ERISA.

[mbozek]

Why is the er using a nq plan? If the employees have comp below 90k the er can set up a qualified plan because there are no nondiscriminaion rules in plans that have no HCEs. The contributions can be deducted in the year the contributions are made and the assets are not subject to the claims of the er's creditors.

[TCWalker]

right on, but does "a contribution" suggests a permanence issue.

[mbozek]

All qualified plans must be permanent. However, contributions to ps type plan only need to be substantial and recurring which is a rather subjective standard. If the er is concerned with this requirement then why not establish an IRA for each ee who the er wants to make contributions for. There is no permanence requirement for an IRA and up to $3,000 can be deposited in the IRA (3500 if age 50).

[KJohnson]

I think the original poster might be worried about how to classify the individuals participating since there is no apparent business reason for who will participate and who will not. I agree with MBOZEK that if they are all NHCEs then you can go ahead and "name names" with regard to participation in a qualified plan. I believe that as long as you pass 410(b) based on ratio percentage as opposed to average benefits then defining classes by names would be o.k. If you only cover NHCEs you automatically pass under ratio percentage.

Of course such a design has problems in having to constantly update your participation criteria to the extent you are going to let new people in the Plan.

Also, you need to watch out for creating a CODA. To the extent that you let people in and out of the Plan and to the extent that they get something (more comp, more vacation etc) for not being in the Plan you would have issues.