qualified plan/non qualified plan

[k man]

our client has both plans though they are not linked or set up as a wrap-around arrangement. basically the administrator gives them an estimate as to how much their HCE's can put into the qualified plan each year and whatever else they want to save they must make an election in their NQDC plan. this year they have ADP refunds and they want to put the refunds into the NQDC plan. i feel that this would easily violate 409A but i am curious if others agree.

[Guest TooMuchFreeTime]

This year they have ADP refunds and they want to put the refunds into the NQDC plan. i feel that this would easily violate 409A but i am curious if others agree.

Assuming that we're talking about refunds from the 2007 plan year that are showing up now in 2008, I'd have to agree. The issue is that the deferral elections need to be made prior to the year in which the compensation is earned. Assuming that the refunds were treated as earned in 2008 (moot point, really - if they weren't, you could defer a piece of 2008 comp of the same amount to the same effect), deferral election would have had to have been made in 2007. There's an exception for new entrants into a NQ plan that provides a window for same-year deferral elections, but that doesn't sound like it applies here. Absent that, I think you're out of luck.

[Steelerfan]

Even if you could make a proper 409A election, the IRS several times before enactment of 409A had taken a public stance against being able to do this. They believe that since the 401(k) regs state the amounts must be distributed, that means they can't be deferred. No one has appeared willing to push the issue.

[pmacduff]

we had a broker try and sell this idea to a client that failed every year as a way to save the deferral refunds. We luckily prevailed in advsing them against it, but it was a tough sell convincing that it wasn't it good idea.

[Guest TooMuchFreeTime]

As long as there was an irrevocable election made prior to the year of the refund, I don't see a problem with it. Any of the reasons why there might be a refund (415, 402(g), ADP) wouldn't affect a participant's ability to contribute to a non-qualified plan.

[Steelerfan]

As long as there was an irrevocable election made prior to the year of the refund, I don't see a problem with it. Any of the reasons why there might be a refund (415, 402(g), ADP) wouldn't affect a participant's ability to contribute to a non-qualified plan.

The IRS begs to differ, they think the 401(k) regs mean the amounts have to be incuded in income.

[Guest TooMuchFreeTime]

The IRS begs to differ, they think the 401(k) regs mean the amounts have to be incuded in income.

Couldn't the same be said of Section 61? Just because one section says it should be included that doesn't preclude another section from giving it a pass.

Of course, I'm assuming your reply would be something along the lines of "I only said that it's the IRS position that...", in which case, point taken. Nobody ever said the Service had to consult the law before coming up with a position....

[Steelerfan]

They made the informal argument that the statute, sec 401(k), requires income inclusion. It seems it might be an uphill battle to argue that rules of constructive receipt/409A which merely allow for deferral would trump a statute that aguably requires inclusion, but i agree its not very clear.