Contingent Benefit Rule and NQDC Plans

[Guest mbw]

Would you agree that if a participant has a choice to defer to a 401(k) plan or a nonqualified plan, this choice violates the contingent benefit rule of Code Section 401(k)(4)(A)?

[QDROphile]

Is this a zero sum arrangement? If it is, what is the purpose?

[Guest mbw]

Is this a zero sum arrangement? If it is, what is the purpose?

If by zero sum you mean the participant has to elect one or the other, then the answer is no. The participant can choose to participate in one or the other or both. Is the fact there is a choice mean that there is a contingent benefit problem? If the participant elects to participate only in the NQDC, it means the participant does not defer to the 401(k). It's extreme and arguably not a problem, but the contingent benefit regs on NQDC are pretty boradly drafted.

[QDROphile]

From your description, it appears that the two arrangements are independent of each other, except to the exent of a participant's potential compensation. The rule is concerned only with contingent arrangements, such as participation in the NQDC plan is allowed only if the indvidual defers or does not defer under the 401(k) plan. The Regulations also provide exceptions for certain arrangements that make NQDC benefits contingent on 401(k) elections. Treas. Reg. section 1.401(k)-1(e)(6)