Non Qualified contributions tied into a 401(k) plan

[Guest jbender]

I have an inquiry concerning a way to wrap-around a n-q plan with their 401(k) plan. Any ideas or suggestions?

[M R Bernardin]

Usually how it works is the employee deferrals go into the nonqualified plan first, then after year end the testing is done on the qualified plan, and then the permissible amount is transferred from the nonqualified plan to the qualified plan (the employee must have a choice between having the money transferred into the qualified plan or taking it in cash, to avoid violating the contingent benefit rule under 401(k)). It is difficult to go the other way (i.e., deferrals into the qualified plan first, with the excess spilling over to the nonqualified plan) because of the contingent benefit rules, at least if the need to defer more income is caused by ADP failures. However, it is permissible for the excess to spill over into the nonqualified plan if the qualified plan deferrals are capped by the 402(g) limit, the 415 limit, or a percentage limit specified in the plan.

[Guest GG]

M R, in your example your have the amount transferred from the NQ plan after the end of the Plan Year. How are taxes adjusted (FICA/Medicare) for the participant after the end of the Plan Year? I would assume that no withholding took place for the NQ contributions during the plan year?

[M R Bernardin]

Actually, in my experience, employers are withholding SS taxes at the time of contribution to the nonqualified plan, as most of the plans we see provide for 100% vesting of those monies and there is no other substantial risk of forfeiture that exists. I suspect another reason for this is that it makes sense to subject the wages to the OASDI portion now, while wages are high, since only a small portion (if any) of the deferrals will be subject to the 6.2% tax, and since neither the deferrals nor related earnings will then be subject to SS taxes coming out. I'm not sure how FICA taxes were addressed in the PLRs which approved this type of arrangement, if at all. If taxes are not withheld at the time of the deferral, it seems as though they would become subject to tax at the time of transfer, under an argument that the employee's rights in the funds vest upon transfer to a qualified plan, in which case I would guess you would take the necessary taxes out of current wages. What have you seen done?

[Guest RS Vatalaro]

I used to work w/ so-called "wrap plans" and read some authoritative literature that NQ deferrals are subject to FICA. Although as previous respondent pointed out, most of those folks exceed OASDI anyway. But still subject to Medicare.

Sorry I cannot remember the cite for what I read, but I do remember it being authoritative, e.g. not just an article.