Silly Question

[Randy Watson]

Could someone please confirm for me that Title II of ERISA only applies to qualified plans. For example, coverage testing is not required for a nonqualified ERISA plan. Thanks.

[mbozek]

Title II also includes IRAs and rules pertaining to 403(b) plans, e.g. 415 limits.

[E as in ERISA]

Most nonqualified plans try to be "top hat plans" for which there are exemptions from participation, funding, reporting requirements, etc. To be a "top hat" the plan must generally be limited to a select group of management and highly compensated employees.

[Randy Watson]

Assume that the nonqualified plan does not satisfy the top hat exemption (it's a funded arrangement). Does Title II of ERISA apply? The plan will be subject to Title I's participation rules (1,000 hours and age 21), but will the plan have to comply with any of the coverage tests of Title II? I believe the answer is no, but I would like for someone to confirm that. Thanks.

[mbozek]

If the plan is not qualfied, benefits will be subject to taxation under the rules of IRC 402(b), including the rule of 402(b)(4) for taxation of HCEs who participate plans that fail to meet the coverage test. I really do not understand your question.

[Randy Watson]

I warned you that this was a silly question. I'm not sure I understand how Title II of ERISA operates. I just want to make sure that a nonqualified funded ERISA plan that is not a top hat arrangement would only have to comply with the minimum participation rules of Section 202 of ERISA and not any of the coverage tests of Title II of ERISA.

[mbozek]

402(b)(4) provides that the benefits of HCEs of Q plans that do not meet either 410(b) or 401(a)(26) will be taxed in the year of such failure as a non qual plan. The benefits of NHCEs in these plans will be taxed under the rules for Qual plans. If the top hat plan is funded then the participants will be taxed on vested benefits, unless the reason for the disqualfication is the failure to meet the 410(b) or 401(a)(26) requirements in which case only the benfits of the HCEs will be taxed.