Contingent Benefit Rule

[XTitan]

Company wants to add a 6% salary match to their nonqualified plan, but in order to receive it, the participant would need to contribute 6% of comp to both nonqualified plan and 401(k). Am I missing something, or does this violate the contingent benefit rule?

[JanetM]

Pulled this from CPA Journal article

Contingent Benefit Rule. A Sec. 40 1 (k) plan will not be qualified if any other benefits (other than matching contributions) are contingent employee contributions. However, the final regulations, provide that deferred compensation under a non-qualified plan will not violate the aforementioned rule merely because it is dependent upon the employee making the maximum contribution under a Sec. 401(k) plan. This rule is intended to permit a non-qualified plan to provide benefits in excess of the elective dollar deferral limit, and will not cause a Sec. 401(k) plan to violate the so-called contingent benefit rule.

QDROphile gave this site in other post - Treas. Reg. section 1.401(k)-1(e)(6).

[XTitan]

And since the client can't guarantee that 6% in the 401(k) will put the nonqualified plan participants over the 15,500 in the 401(k), smells like a bad idea to me (which doesn't get into the problems of linking the NQDCP to the QP which is another discussion for another message board).

[Guest Sieve]

The contingent benefit rule doesn't apply here, because this situation does not make anything contingent on deferring or not deferring into the 401(k) plan (other than the match, which is permissible). No one is getting something extra for deferring (other than the match) or for not deferrring, or suffering a detriment for deferring or for not deferring. Rather, a match is being promised if you defer (which, again, is permissible) and, also, if you do something else. There's nothing that I know of in 401(k) that prohibits that.

Of course, there are other issues. There is a potential 410(b) failure for the match, because, while anyone is eligible if they defer enough, some are not eligible because they do not contribute to the NQDC or are not even eligible for the NQDC. Then there is the 401(a)(4) issue: whether the required deferral in order to receive a match is too high. And do we also have a 0% & a 6% rate of match that needs BRF testing?

[Everett Moreland]

I doubt that a matching contribution to a nonqualified plan is a matching contribution for purposes of the contingent benefit rule. See the definition of matching contribution in 1.401(m)–1(a)(2). See also the following 1.401(k)-1(e)(6)(iv):

"Except as otherwise provided in paragraph (e)(6)(iii) of this section, participation in a nonqualified deferred compensation plan is treated as contingent for purposes of this paragraph (e)(6) to the extent that an employee may receive additional deferred compensation under the nonqualified plan to the extent the employee makes or does not make elective contributions."

[Guest Sieve]

Sorry, I misread the OP (good catch, Everett). I thought the match was going into the 401(k) rather than the NQDC plan, so I was way off base (although I gave a great answer based on my misread!!! . . . )

So, the contingent benefit rule is brought into play. A 6% 401(k) deferral will not permit the individual to reach the Section 402(g) max of $15,500. However, if the elective deferral under the 401(k) plan is limited to 6% as per plan provisions, then this still is not a contingent benefit and is ok: "Deferred compensaton under a [NQDC plan] that is dependent on an employee's having made the maximum elective contribution under [iRC] section 402(g) or the maximum elective contributions permitted under the terms of the [401(k)] plan is not treated as contingent." (Treas Reg. Section 1.401(k)-1(e)(6)(iii), emphasis added.)

On the other hand, if elective deferrals under the 401(k) are not limited to 6%, then the applicable reg. is the one cited by Everett, and I would agree that this is a prohibited contingent benefit.

[XTitan]

Sorry, I misread the OP (good catch, Everett). I thought the match was going into the 401(k) rather than the NQDC plan, so I was way off base (although I gave a great answer based on my misread!!! . . . )

So, the contingent benefit rule is brought into play. A 6% 401(k) deferral will not permit the individual to reach the Section 402(g) max of $15,500. However, if the elective deferral under the 401(k) plan is limited to 6% as per plan provisions, then this still is not a contingent benefit and is ok: "Deferred compensaton under a [NQDC plan] that is dependent on an employee's having made the maximum elective contribution under [iRC] section 402(g) or the maximum elective contributions permitted under the terms of the [401(k)] plan is not treated as contingent." (Treas Reg. Section 1.401(k)-1(e)(6)(iii), emphasis added.)

On the other hand, if elective deferrals under the 401(k) are not limited to 6%, then the applicable reg. is the one cited by Everett, and I would agree that this is a prohibited contingent benefit.

Thanks - you have confirmed one of my suspicions about this. Good thing client was told to check with QP counsel before adding to NQDCP.