409A and NQDC deferrals that begin when 402(g) limit is hit on the 401(k) plan

[Guest Bud]

In our NQDC plan, top-hat employees must make a deferral election before the plan year and they are locked in for the plan year. Deferrals to our NQDC plan begin when the participant hits the 402(g) limit in the 401k plan. Participants are allowed to change their 401k election at any time and it will be effective on their next paycheck.

Under the new deferred comp law (Code section 409A), NQDC plan participants are not allowed to increase or decrease the amount of their deferrals during the plan year. If a participant changes his or her 401k deferral election during the year, it affects when he or she will hit the 402(g) limit, which in turn affects when NQDC deferrals begin. If they begin sooner, the participant effectively increased his or her deferral amount into the NQDC plan. If they begin later, the participant effectively decreased his or her deferral amount.

Under the transition rules for 409A, deferral amounts for 2005 have to be locked in by March 15.

Does anyone have this problem and what are you doing about it? If you don’t have this problem, what do you suggest we do? I suppose we could lock-in 401k election for NQDC participants or require NQDC participants to elect an amount for the year, rather than a percentage per pay.

[Guest AEA]

I would be interested in anyone's thoughts on this also, as I have at least one plan that is operating this way, even though the NQDC documents speaks of an irrevocable election. I can't wait to tell the client that their "nifty" computer program designed to help participants max qualified amounts before contributing to the NQDC plan has to be scrapped!

[Guest Do]

I'm interested too, but don't know what to do, other than requiring an election of amount, rather than an election of percentage of pay. We could also require an election of when deferrals must begin, which participants can move up in the year.

Bud, locking in 401(k) elections won't work because the 401(k) participants must be allowed to change their elections at least once a year under the final 401(k) regs.