Contingent Benefit Rule

[Guest StephenJ7976]

Facts:

-An employer sponsors the following three plans: (1) a 401(k) plan, (2), a money purchase pension ("MPP") plan, and (3) a nonqualified excess benefit plan.

-The MPP plan provides an annual nonelective employer contribution equal to 10% of base compensation.

-To the extent that a participant elects to make deferrals to the 401(k) plan and the annual additions credited to his accounts under the 401(k) plan and the MPP plan exceed the IRC §415© limitations, annual additions under the participant's MPP plan account are reduced first and contributed to the participant's account under the nonqualified excess plan.

Question: Because nonelective employer contributions under the MPP plan may be cut back in order to satisfy the IRC §415© limitations depending on the level of elective contributions made under the 401(k) plan, does the nonelective employer contribution under the MPP plan constitute an impermissible contingent benefit under IRC §401(k)(4)(A) and Treas. Reg. §1.401(k)-1(e)(6)(i)?

[Mike Preston]

Maybe I'm missing something, but even if a participant has $245000 in base compensation, and therefore receives $24,500 in the money purchase plan, when the maximum deferral of $16,500 is added to it, you don't go over the 415 maximum of $49,000. What am I missing?

[Guest StephenJ7976]

The 401(k) provides for employer matching contributions equal to 100% of elective deferrals up to 6% of compensation. So a participant earning $245,000 and maxing out his elective deferrals could receive $14,700 of matching contributions under his 401(k) plan account. Coupled with $16,500 of elective deferrals and $24,500 of MPP Plan contributions, the participant would have annual additions equal to $55,700 for the limitation year ($6,700 of which would be received under the excess plan). If the participant alters his deferral election, could the fact that he will receive more of his MPP plan contribution under the MPP plan rather than the excess plan be considered a violation of the contingent benefit rule?

[Guest W Waldan Lloyd]

I don't think the contingent benefit rule applies here. The purpose of that rule is to prevent an employer from tying the right to receive a benefit accrual in another plan to the employee's deferral election in the 401(k) plan. But you have a more serious problem. The MPP is an individual account plan subject to the minimum funding standards of Code §412. See §412(a)(2)(B). As a consequence, any failure to fund the entire benefit under the MPP is a reduction in the rate of benefit accrual - and requires an advance 204(h) notice. That would seem to be tough to coordinate, since you don't know the actual rate of reduction until the deferrals and related match have actually accrued. A better arrangement would be to limit the deferrals or matching contribution under the 401(k) plan, rather than the amount of MPP contribution, if there is a 415 problem. Also, is the participant it least 50 years old? You may be able to use the catch up contribution rules to get an additional $5500 of allocation.