Participant Inadvertently Deferred More Comp Than Available

[Eric Taylor]

Basic deferred comp plan permits participants to defer up to 85% of income.  Most don't defer that high or if they do don't have a problem with other deductions.  One participant however, has significant deductions for other benefits including basically every welfare plan offered such that FICA taxes and other deductions from pay before the deferred comp deferral total just over 16%.  In short, he cannot defer the requested 85% and cover taxes and benefit plan deductions.  The plan, for better or worse, does not expressly address conflicts with other deferral elections (not sure if it would help even if it did).  What to do here?  Seems inappropriate to disregard or invalidate the entire deferral election.  Are they best to honor the deferral to the maximum extent possible?  If so, is it fair to assume that all other deferral elections (health insurance, flex plan, deferrals) should take precedence and just put the remainder into the deferred comp plan even though not at the full election level?

[RussMorgan]

Let’s take a look at this question and a possible answer from a different angle. 

If the 85% deferral is set-in-stone the employee must still make the other required payments for FICA and the other deductions on a timely basis.  The easiest way to do that is via another pay source during that same pay period.  If there is not another pay source, then we need a good argument to reduce the 85% deferral.  (Some companies take those deductions over the next several pay periods but I am not a firm believer in that approach.)

If we say that the order of the deductions is healthcare and other deductions first then FICA taxes last, if there is not enough money left over to pay the FICA taxes then the employee just violated Code section 3121(v)(2) which could lead to their entire account balance being FICA taxable, with penalties, when it is finally paid.  This argument alone may convince the participant that you really do have their best interest at heart and must limit their deferral to an amount less than 85%.

To handle similar issues in the future, at least until the plan document is revised, you could draft a separate document that provides those guidelines on the maximum deferral.  Remember that 409A permits…..“The material terms of the plan may be set forth in writing in one or more documents.”

In Oracle’s plan document, available via their 10-K report, you can see how they handled this situation:

“The maximum amount permitted to be deferred from Base Salary and Variable Compensation is the amount remaining after all deductions for other benefits and taxes are first deducted from the gross payment”.

I hope this helps and let me know if you have any other questions. 

RussMorgan@nqdcsolutions.com