Wrap Plan

[Randy Watson]

Assume that you have a nonqualified wrap plan. Participants in the plan can elect to have a portion of their nonqualified deferrals transferred to a 401(k) plan after the permissible contribution limits of the 401(k) plan are determined. For example, a participant elects to have $50,000 deferred to the wrap plan and then have that amount reduced by the maximum permissible contribution to the 401(k) plan. The PLRs that I have read all say that if a participant elects to transfer an amount that is greater than the maximum contribution allowed to the 401(k) (for example, the ADP results for the 401(k) prohibit a contribution greater than $8,000 even though the participant elected to contribute the 402(g) limit) that the difference between the permissible contribution and the elected amount ($8,000 and the 402(g) limit) will be paid to the participant in cash by March 15 of the following year. The cash payment apparently preserves the CODA requirement. My question is if this cash distribution is required, then what is the benefit of creating this type of arrangement? Why wouldn’t you just have a 401(k) plan and an unlinked NQ plan? Did I miss a PLR or something else?

[TCWalker]

Well, I may have missed your real question, but in my experience the traditional arrangment was the participant elects the max. permissible (k) contribution from the prior year's NQPlan deferral following the ADP test(s) run at year-end, hence there is no fall-out to cash.