HCE determination question - NQ deferred comp

[Guest tellidaho]

Are we required to include elective contributions made to a nonqualified deferred compensation plan as "compensation" when determining HCE status? My thought is yes, since I don't see anything in the regs that permits the exclusion. However, plan administrators are telling me they do not include. Thoughts?

[jpod]

Doesn't the HCE definition of "compensation" start with taxable comp? What makes you think you would include non-taxable deferred compensation deferrals?

Just as an aside, however, if you have people close to the HCE dollar threshold who are participating in a nonqualified plan, you may have ERISA problems (i.e., the nonqualified plan failing to be a top hat plan). This is a facts and circumstances issue dependent upon the people involved, the total number of employees, etc.

[Guest tellidaho]

It just seems odd to me that someone can effectively choose whether or not to be an HCE by choosing to contribute (albeit a significant amount) to a NQ plan when other amounts that are not taxed are included in the definition of compensation - although 415©(3)(D) does say that only "certain" deferrals are included.

The point in your aside is familiar to me, but thanks for the reminder.

[jpod]

If I were a non-owner employee or a less than 5% owner, I sure as heck wouldn't defer compensation just to move out of HCE status. I might wish to defer comp., but not for that reason.

[Guest tellidaho]

Me either...but we do have participants asking us about this as we recently imposed a contribution limit for HCEs to aid our ADP/ACP testing. These are participants who are already deferring a significant amount into both the qualified and NQ plans.

[jpod]

Ignoring the top-hat issue for the moment, wouldn't the concerns of these HCEs be addressed by a tandem qualified/nonqualified arrangement?

[Guest tellidaho]

That's an excellent idea that I hadn't put on the table yet, so thank you! We'll have a solution in place for 2007 to address their concerns. I was just surprised that this kind of "manipulation" would be legally allowed. On the other hand, it will only help our testing, so I guess I shouldn't look askance at it.