Non-qualified 401(k) Excess Plan

[Guest Edward McElroy]

Under a non-qualified 401(k) excess plan, an executive made an election in December of 2004 to defer 10% of his compensation. Because the Company's qualified 401(k) plan uses the prior plan year testing method, in February of 2005, the executive is told that he can contribute 5% of his compensation to the qualified 401(k) plan. Accordingly, an amount is transferred from the non-qualified 401(k) excess plan to the qualified 401(k) plan. Given the existence of the PLR that indicates that such a tranfer is not a distribution, is this arrangement still permitted under Code Section 409A? Thanks in advance. Ed

[Kirk Maldonado]

What is your analysis of the situation?

[Guest Edward McElroy]

I am thinking that the transfer to the Company's qualified 401(k) plan would be treated as a distribution under Code Sectuion 409A. However, I ran this question past a former official at the IRS National Tax Office and he believed that the answer was not entirely clear.

[Kirk Maldonado]

To avoid having to draw a lot of unnecessary distinctions, I would hope that the IRS would take the position that there isn't a distribution unless the amounts are includible in the participant's income.

[Alf]

Treasury has stated that these plans will not work under 409A, but without any detail. There is a least one long thread on this board with theories about what the IRS is worried about, but weare assuming that they won't work after 2004.

[Kirk Maldonado]

Alf:

That was the position taken in the first teleconference.

They changed their tune in the second teleconference and said that some definitely work but they hadn't decided the test for determining which other types of plan design features were acceptable or objectionable.

[mbozek]

Regardless of the statements of IRS officials, the IRS may decide to prohibit such programs because of their inconsistency with the 401k reg provison requiring that excess amounts be included in gross income and the objective of 409A to raise 1B in revenue over 10 yrs. Codifying a deferral technique previously allowed only in PLRs will encourage every employer to adopt such a provision to avoid 409A and reduce revenue collection. I think the burden is on the proponents of these transfer programs to explain why the transfer of excess deferrals shouldnt be a taxable distribution under change in the tax law under 409A.