NQDC inclusion in Money Purchase Plan Definition of Comp

[Guest Gumby]

I've been told that a qualified plan definition of compensation cannot include voluntarily deferred compensation under a nonqualified deferred compensation plan. I do not see any support for this position since I do not believe voluntarily nonqualified deferrals are considered "employer contributions".

For instance, would deferral into an excess benefit plan reduce compensation for purposes of the qualified money purchase plan?

[QDROphile]

Find an acceptable definition of compensation and see if the nonqualified salary reduction is in it. For example. a lot of plans use a definition that resembles taxable W-2 pay with certain reductions added back (e.g. 401(k) and 125). Nonqualifed reductions would not be in that definition. Section 414(s) would be a good place to start. Happy hunting.

[Guest Sieve]

Gumby --

What you heard is correct. Deferrals into a NQDC plan are not included as comp, since they would NOT be considered compensation or included in gross income in the year deferred. All definitions of compensation start with amounts includible as gross income, and the rule is that a deferral into a NQDC is not includible in gross income: " . . . compensation means . . . wages [etc.] to the extent that the amounts are includible in gross income (or to the extent amounts would have been . . . includible in gross income but for an election [under a 401(k) or cafeteria plan]." (Treas. Reg. Section 1.415©-2(b)(1), emphasis added.) (And, for a 401(k) plan, deferrals can only be taken out of compensation as defined in the 1.415©-2 regs (Treas. Reg. Section 1.401(k)-1(e)8)), so NQDC deferrals cannot be considered for 401(k) deferral purposes.)

I would assume, however, that those NQDC deferrals could be added to the MPPP's definiton of compensation for allocation purposes, as long as it does not produce a discriminatory definition of compensation or a discriminatory allocation--but the 415 definition of compensation would exclude those amounts when calculating annual addition limitations.

Likewise, payments from a NQDC are not included in comp, except that the plan is specifically permitted to provide otherwise:

" . . . any distributions from a plan of deferred compensation (whether or not qualified) are not considred as compensation for section 415 purposes, regardless of whether such amounts are includible in the gross income of the employee when distributed. However, if the plan so provides, any amounts received by an employee pursuant to a nonqualified deferred compensation plan are permitted to be considered as compensation . . . in the year the amounts are actually received, but only to the extent such amounts are includible in the employee's gross income." (Treas. Reg. Section 1.415©-2©(1).)

This is an issue because payments from a NQDC plan are, in fact, reported as W-2 income.