NQDC Distributions to 401(k)

[Randy Watson]

There do not appear to be many restrictions on what type of compensation can be deferred into a 401(k) plan. Based on informal comments by the IRS (and prior to the new 415 regs), it seems as though the only significant restriction is that the compensation must be payable to an employee. So here is the question: can an individual elect to defer nonqualified deferred compensation distributions into a 401(k) plan and have those contributions made on a pre-tax basis?

Assume: (1) that the elections to have those distributions contributed to the 401(k) plan are made prior to participating in the NQDC plan (no control over those assets at the time of election); (2) the 401(k) plan's definition of compensation for deferral purposes includes distributions from a NQDC plan; and (3) the individual is an employee when the distributions/contributions are made.

Would this be okay under the 401(k) rules? Would this be considered a second deferral under 409A that could potentially trigger the penalty? Please help. Thanks.

[QDROphile]

#3 indicates you really need not bother in most circumstances. A person who is eligible for NQDC is usually quite well paid. Deferrals to a 401(k) plan in a year are limited. Instead of looking to NQDC income for the year, the employee can defer the maximum from regular pay for the year. What is to gain? Dollars offset dollars.

[Kirk Maldonado]

QDROphile:

You are right in the vast majority of cases. But I've see participants elect to receive installments after a fixed number of years (even if they are still employed). It doesn't happen often, but it does occur from time to time.

[Randy Watson]

Do you see any 409A issues?

[QDROphile]

OK, they elect to receive installments of deferred compensation. But they are also receving regular compensation while they are receiving the installments. So why bother with any issues about deferring amounts out of deferred compensation when they can defer out or regular compensation and not cause questions? Is regular compensation insufficient to sustain maxuimum deferrals at that time? I must be missing something.

[mbozek]

Will NQDC distributions which are contributed to a 401k plan by the employee be subject to FICA tax again under IRC 3121(v)(1) which includes as wages amounts which are contributed as pre tax contributions under 402(e)?

Q has it right -it is a 0 sum game where the 401k contributions come from, so why bother with making them from NQDC distributions if there could be collateral tax issues?

[Randy Watson]

What about individuals who know they will take on a lesser role in the future (for example, a part time/consulting role)? If their regular comp would be under the 402(g) limit at that point, wouldn't it be beneficial to permit these individuals fund the 401(k) through NQDC?