Deferral Elections and DB-type SERPs

[Guest SCUDDESLER]

We have a client that sponsors a defined benefit plan type supplemental executive retirement program (the type of plan the IRS refers to in IRS Notice 2005-1 as a "nonaccount balance plan"). The SERP is subject to Code Section 409A. The question we have is (1) whether the SERP is subject to the deferral election requirements and (2) if so, how the amount of the deferral each year should be computed. If the SERP is subject to the deferral election requirements (and we cannot figure out a reason why it would not be), then the 2005 deferral election must be made by March 15, 2005. If the IRS does not issue further guidance between now and then, the deferral election will have to be completed before the IRS provides guidance on how a deferral to a nonaccount balance plan is computed. We recognize that a good faith interpretation of the rules may be necessary and are wondering if any other practioners are dealing with this same issue. Thanks in advance for any comments/suggestions.

[Guest Grumpy455]

I don't follow. A nonaccount balance plan does not have "deferral elections" like a 401(k) type plan (i.e., a nonqualified deferred compensation plan in which a participant actually chooses to defer a specific amount of their pay--5%, 12%, $8,000, etc.). I don't think a nonaccount balance plan, even if subject to 409A, is subject to the deferral election requirements. That seems like apples and oranges to me. ???

[Guest SCUDDESLER]

A nonqualified deferred compensation plan may take the form of a defined benefit plan--i.e., a plan which provides a specific level of benefit rather than a specific contribution formula. With a defined contribution type NQDC plan, it is easier to quantify the "deferral" because the contribution is "defined" and the deferral is simply the contribution. However, in a defined benefit type NQDC plan, a benefit (which will be paid at some point in the future) is defined. One way to quantify the "deferral" might be to treat the deferral as the annual accrual under the plan. I am not sure your comparison of a defined benefit type NQDC plan with a deferral election is an apples/oranges comparison (although the possibility that it might be is the reason for my question in the first place).

[Guest Grumpy455]

Maybe someone else can help me explain the apples/oranges comparison. I still don't think the idea of a nonaccount balance plan and a deferral election makes any sense--a deferral election relates to a 401(k) type plan (albeit a nonqualified plan).

[Guest SCUDDESLER]

Not to change the subject a little, but the new reporting requirements apparently will require that deferred compensation be reported each year. As far as we can tell, nonaccount balance plans are subject to these new reporting rules. If true, some amount of deferral will have to be computed for this purpose as well--again, the amount of the deferral might be equal to the benefit accrued over the course of the year or maybe the present value (as of some specific date) of that additional benefit accrual.

Has anyone been thinking about this calculation in addition to the deferral election question? Thanks.