Nonqualified Plan Elective Deferral Amount

[Atila]

I have a client who would like to adopt a nonqualified plan that will act to allow highly compensated employees to defer an amount equal to the excess contribution refund that the employee will receive from the employer's qualified 401(k) when the plan fails its ADP/ACP testing.

I understand that 409A requires that the employee make an irrevocable election to defer compensation on or before the last day of the year prior to the year during which compensation is earned.

Under the contemplated nonqualified plan, the amount deferred under the nonqualified plan would only be equal to the amount that the employee receives as a refund from the 401(k) plan. However, the deferral would be taken from current year wages and the refund would be refunded to the participant and reported on Form 1099-R.

Does anyone know if it is acceptble under 409A to allow the highly compensated employee defer an amount equal to the refunded excess contribution on or before December 31 (the last day of the prior service year) when the employee does not yet know who much the excess contribution refund will be? I guess I am concerned that the dollar amount of the election is not certain at the time the deferral is made. On the other hand, if the deferral is equal to 100% of some formula/amount, then this seems like a "determinable amount".

Any direction would be greatly apprecaited! Thanks!

[QDROphile]

This is a really stupid idea. If the employer is going to the trouble of maintaining a nonqualifed plan, it should not be limited in such a complicated way. Among other things, it is an invitation to mistakes in the plan

[Peter Gulia]

Atila, some employers use a set of plans' designs and elections that run in the opposite direction:

Before the beginning of a year, a participant irrevocably elects deferrals under an unfunded nonqualified deferred compensation plan. That plan provides that the amount that is the lesser of the year's deferrals or the amount that could be allocable to the participant's account under the 401(k) plan is distributed to the participant by March 15 of the year after the year for which the deferral was made unless the participant had irrevocably elected (before the beginning of the year for which the participant earned the compensation) to treat that amount as deferrals under the 401(k) plan. Parallel provisions govern the matching contributions.

IRS Letter Rulings 95-30-038, 97-52-017, 97-52-018, 1999-24-067, 2000-12-083, 2001-16-046.

An employer considering such a design should consider that not everyone who is a highly-compensated employee for the 401(k) plan necessarily can be a select-group employee for an unfunded plan.

A participant considering the elections described above should carefully evaluate the risks of the employer's unsecured promises and creditors' access to amounts not held under the 401(k) plan.

Also, this requires picture-perfect drafting of the documents and elections.

[jpod]

1. Consult with a lawyer knowledgeable about securities registration requirements/exemptions for NQ elective deferral plans.

2. Opening it up to all HCEs may cause the plan to fall out of the "top hat" exemption.

[Mark Whitelaw]

As a HCE option there is The STAR Plan (Strategic Talent Appreciation and Recognition) - an individual after-tax institiutional life insurance (ILI) funded investment and risk management program - same ILI products large employers invest through for NQDC (COLI) but made available for personal ownership.

By 2002 the ILI products funding NQDC had financially evolved into a higher HCE value than a NQDC plan. So in 2002 we moved the ILI plan sponsor role from the employer to our ILI TPA firm - why STAR is available to all HCE's. Employer is merely assisting in HCE awareness of their qualification to join our program and validating role and compensation for ILI underwriting qualification. Hence, a pat-on-the-back and baton pass. No employer costs, liabilities, regulatory or HR issues. The HCE chooses the issuer, contribution capacity, asset allocation, etc, etc. And if the employer wants to make contributions (match, incentive, etc) they can via Bonus 162 with an optional REBA (Restricted Employee Bonus Arrangement) to provide a vesting schedule on the bonus.

STAR serves as (1) a savings complement to the tax-qualified plan / alternative to taxable fund investing and (2) for those in a NQDC plan a distribution management container for life-after-career.