NQDC Deferrals reduce 401(k) eligible comp?

[Guest caseyb]

Do NQDC deferrals reduce eligible earnings available for a 401(k) deferral? Which scenario is correct, both using a 10% NQDC deferral and a 10% 401(k) deferral:

Scenario A:

$200,000 Earnings

($20,000) Deferred Comp

($20,000) 401(k)

Scenario B:

$200,000 Earnings

($20,000) Deferred Comp

($18,000) 401(k) (10% of earnings after deferred comp)

If my client uses the wrong method, what are the corrective measures/repercussions?

Thanks and Happy Thanksgiving.

[XTitan]

I'm a little out of my league when it comes to 401(k)'s but I'll give it a shot. What does the plan say is the definition of comp? If the definition of compensation is 414(s) or 415©(3), then 415©(3)(D) says

(D) Certain deferrals included

The term “participant’s compensation” shall include—

(i) any elective deferral (as defined in section 402 (g)(3)), and

(ii) any amount which is contributed or deferred by the employer at the election of the employee and which is not includible in the gross income of the employee by reason of section 125, 132 (f)(4), or 457.

Since NQDC deferrals are not included in income under 409A/451, and not included due to 125, 132, or 457 (or 402(e)(3), 402(h) or 403(b)), generally NQDC deferrals are excluded from the definition of comp.