Distributions based on non-compete clause

[401_4_ever]

Has anyone ever heard of a plan that is able to condition the form of distribution based on the terminated employee's willingness to sign a non-compete clause with the employer? This plan states if you sign a non-compete clause you can have a lump-sum payout, but if you don't sign it, you have to take an annuity payment only.

Seems to me to be violating the contingent benefit rule, but the plan claims to have a determination letter on it.

[Guest mjb]

While such a provision may be permissible in form under IRC 401(a) it creates some nondiscrimination issues such as BRF if NHCEs refuse to sign the non compete and are limited to an annuity while HCEs sign it to elect a lump sum. Need to think through the complications caused by such a provision to determine if it compromises plan's qualified status.

[masteff]

My understanding is that the contingent benefit rule is more narrow than you're alluding. It says that a 401(k) plan cannot make benefits (other than the employer match) contingent on an employee’s decision to make (or not make) deferals into the plan. But otherwise, benefits and features can be contingent on other things (like a certain number of points from age plus service, or reaching a certain age while in service, or being under a severance program versus other terminations/retirements). Since a non-compete clause is not related to whether an employee makes or doesn't make deferals, then it appears to be a valid restriction.