Deferred Compensation

[austin3515]

Participant makes voluntary deferred compensation contributions to a 409A Plan. His gross wages are $100,000 (just to keep it simple) and he contributes voluntarily $5,000.

Is his 3% Nonelective Contribution based on $100,000 or $95,000?

Note that "deferrals to a NQDC Plan" is NOT an add-back listed the way other pre-tax deferrals are.

I am pretty sure it is $95,000 but can't understand why that doesn't get more press. I've had it crop up as an issue more than once.

[Belgarath]

Excluded.

[austin3515]

https://advisor.fidelity.com/app/proxy/content?literatureURL=/969837.PDF

"Income deferred does not reduce any other employer-provided benefits, such as employer matching contributions to a 401(k) plan or benefits under a qualified defined benefit plan. Generally, this means compensation used in determining benefits under the qualified plans should not be reduced below the qualified plan annual compensation limit ($255,000 for 2013)."

Am I the only one who feels like this is generally ignored?

[Belgarath]

Not quite sure what you mean. Do you mean that from an overall employee benefits design viewpoint, the fact that compensation for other plan purposes is reduced, and therefore the NQDC "benefit" is lessened?

[austin3515]

Right. Imagine the shock when I tell Executive A that because he voluntarily chose to contribute $5,000 to the 409A Plan, he is going to lose $150 of Safe Harbor.

See my concern?

[jpod]

I wouldn't be surprised if Executive A is shocked, but on the other hand even if he is only in the 25% bracket he is saving the $1,250 in current Federal income tax which was his goal in the first place (plus any deferred State taxes), and further perhaps he is getting a match on the NQ deferral. Your post raises all sorts of ancillary questions about offering elective deferred comp to people not clearly in the top hat group and/or with comp below the 401(a)(17) limit, but those are questions for another day perhaps.

[Belgarath]

Yup.

[austin3515]

The math was just easier with 100k. Clearly the exec wants not only the tax savings but also the we contribution. I try not to think people unreasonable when they are being reasonable.

[jpod]

I am not seeing the problem here. If he wants the $150 SHNC (in your example), then all he has to do is stop deferring under the NQ plan.

[austin3515]

Ok ill give him your number and you can explain it to him... maybe imnoverthinking it but I think he'll be upset and incredulous.

[jpod]

Why would he be mad at you? And, sorry, but I don't believe he would have done anything differently had he known in advance. Maybe he'd try to coax his employer into paying him the $150 they were saving on his SHNC, but that's about it. You can extrapolate using any numbers you wish, e.g., a $50,000 NQ deferral and a loss of $1,500 in SHNC, but I doubt he would have done anything differently.

[BG5150]

Depending on the definition of comp of the plan, when he takes the money OUT, it may be included in that year's income, so he'll get a SH on that comp.

[austin3515]

Not if payment is contingent upon termination, which it almost always is in these things.

[Peter Gulia]

I've seen experiences similar to some possible reactions austin3515 alludes to:

An employer includes for an unfunded plan's select-group employees some who have (unreduced) compensation less than the 401(a)(17) limit. One of those employees makes a salary-reduction deferral under the unfunded plan, and expresses surprise when he discovers that reducing his salary lost him a portion of a nonelective contribution to a funded plan.

In the experiences I've seen, the TPA was in a position to prove that plain-language descriptions, for both plans, explained how the deferral under the unfunded plan affects the contribution under the funded plan. But the complaining participant diffidently asserts that someone should have explained the point orally; 'don't you know I'm too busy to read anything?'

An employer can diminish this kind of problem by providing a continuation of the nonelective contribution under the unfunded plan.

[K2retire]

The math was just easier with 100k. Clearly the exec wants not only the tax savings but also the we contribution. I try not to think people unreasonable when they are being reasonable.

One of our clients calculates how much their people are missing for this reason and contributes that to the nonqualified plan on their behalf.

[hr for me]

Most plans I worked on in the past made up any shortchange from the 401k plan into the NQDC plan.

[jpod]

Now come on, you are all being sensible. There's no place for that around here.