Contingent Benefit Rule

[EBECatty]

I see a few related threads on the topic, but is there a clear answer on the following:

In its 401(k), the employer matches 100% up to 4% of compensation. For people earning above the 401(a)(17), their match is limited by the 401(a)(17) cap at under 4% of their total compensation. So if they earn $400,000 and defer $19,000, their match is capped at $11,200 ($280,000 * 0.4) whereas a match based on 4% of their total compensation would have been $16,000 ($400,000 * 0.4). 

If the "missed" amount due solely to reaching the 401(a)(17) limit ($4,800 above) is either paid in cash or is contributed (as an employer nonelective contribution) to a nonqualified plan, does that violate the contingent benefit rule?

[Luke Bailey]

EBECatty, I'm pretty sure I asked exactly this question several months ago and no one responded.

[XTitan]

I asked an unrelated question about the CBR a decade ago, but the comments in response to my question back then imply putting the match into the NQ plan is fine.

 

[Luke Bailey]

9 minutes ago, XTitan said:

I asked an unrelated question about the CBR a decade ago, but the comments in response to my question back then imply putting the match into the NQ plan is fine.

 

I guess if your NQDC plan says that you only get the match percentage on the amount over the 401(a)(17) if you defer the 402(g) limit (or lower amount permitted by k plan), then you are safely within 1.401(k)-1(e)(6)(iii). E.g., in the example the individual contributes $12,000 and the k plan match would be limited to $11,200, and they would not get the extra $800 in the NQDC plan, assuming that the individual could have deferred the full $19,000, or in any event more than $12,000. But if the person contributed $19,000, then they would get the additional $4,800 in the NQDC plan. But if the person who contributed $12,000 got the additional $800 in the NQDC plan, would seem like you would be out of 1.401(k)-1(e)(6)(iii) and in 1.401(k)-1(e)(6)(iv), and would violate the contingent benefit rule.

[EBECatty]

Thank you both. I saw both of those threads, and I guess am a little surprised there's not a clearer answer to what seems like a fairly common and unobjectionable scenario. 

XTitan, my impression from that thread was primarily that it was fine from a 409A/NQDC side (the 409A preamble seems directly on point), but I've also seen some commentary suggesting that even though it's permissible under 409A, it's still a violation of the contingent benefit rule on the 401(k) side. 

Luke, I had tried to shoehorn it into the same exception, and agree your example would work, but the only "limit" exceeded in my example is the percentage of compensation that can be matched, which I think is a stretch under the language of the NQDC exception in the contingent benefit rule. 

[Luke Bailey]

EBECatty, there is  an excess plan exception, which applies only where the amount is limited by 415(c), of course. What I was pointing out is that an NQDC contribution that is contingent on a participant's making the maximum permissible deferral also gets a pass. So if your plan says, "We will put the portion of the match that would otherwise be made, but for 401(a)(17), in an NQDC plan," that would seem to be OK as long as you also say, "but only if you have made the maximum deferral permissible under the plan." Otherwise, it would not be OK.

[formeractuary]

Can the employee not directly defer the missed around into the NQDC? I realize that doesn't directly address the question you posed, but it would seem to get around any contingent benefit issues.

That said, I would agree that a non-elective ER contribution to address the missed amount in the k plan would be problematic.

[MWeddell]

I don't find the original poster's questions to be difficult, which makes me wonder whether I'm overlooking something!

Case one:  If the $4800 is paid in cash only if the employee makes elective deferrals to the 401(k) plan, then it violates the contingent benefit rule.  Cash remuneration expressly is included as an example of an "other benefit" to which the contingent benefit rule applies.  I don't see anyone in this thread arguing against that conclusion.  See also IRS Q&A 2007-29 from the annual American Bar Association meeting.

Case two:  If the $4800 contribution is paid to the nonqualified plan only if the employee makes deferrals to the 401(k) plan, then it still violates the contingent benefit rule.  The nonqualified plan is not a Section 415(c) excess benefit plan, so Treas. Reg. Section 1.401(k)-1(e)(6)(iii) is inapplicable and 1.401(k)-1(e)(6)(iv) is applicable.  If the nonqualified plan is subject to 409A, then it also is a problem with the deferral election timing rules, although admittedly it's quite difficult to read Treas. Reg. Section 1.409A-2(a)(9), especially the reference to (iii).

In both cases, the problem goes away if the contribution is made in cash or in the qualified plan without regard to whether the employee defers into the 401(k) plan.  If the employer wants to pay a cash bonus or make an employer nonelective contribution to the nonqualified plan of 4% times (actual compensation minus 401(a)(17) compensation limit), then that's fine.  Given the typically high 401(k) participation rates for employees earning over the 401(a)(17) pay cap, the additional cost for that work-around may be slight.

That's my understanding, although I would like to be wrong.

[Luke Bailey]

 

On ‎11‎/‎1‎/‎2019 at 4:10 PM, MWeddell said:

I don't find the original poster's questions to be difficult, which makes me wonder whether I'm overlooking something!

Case one:  If the $4800 is paid in cash only if the employee makes elective deferrals to the 401(k) plan, then it violates the contingent benefit rule.  Cash remuneration expressly is included as an example of an "other benefit" to which the contingent benefit rule applies.  I don't see anyone in this thread arguing against that conclusion.  See also IRS Q&A 2007-29 from the annual American Bar Association meeting.

Case two:  If the $4800 contribution is paid to the nonqualified plan only if the employee makes deferrals to the 401(k) plan, then it still violates the contingent benefit rule.  The nonqualified plan is not a Section 415(c) excess benefit plan, so Treas. Reg. Section 1.401(k)-1(e)(6)(iii) is inapplicable and 1.401(k)-1(e)(6)(iv) is applicable.  If the nonqualified plan is subject to 409A, then it also is a problem with the deferral election timing rules, although admittedly it's quite difficult to read Treas. Reg. Section 1.409A-2(a)(9), especially the reference to (iii).

In both cases, the problem goes away if the contribution is made in cash or in the qualified plan without regard to whether the employee defers into the 401(k) plan.  If the employer wants to pay a cash bonus or make an employer nonelective contribution to the nonqualified plan of 4% times (actual compensation minus 401(a)(17) compensation limit), then that's fine.  Given the typically high 401(k) participation rates for employees earning over the 401(a)(17) pay cap, the additional cost for that work-around may be slight.

That's my understanding, although I would like to be wrong.

MWeddell, I don't think anyone is disagreeing with your points, but remember there is the exception that if in order to get the additional amount (only in the NQDC plan, not as cash) the participant must contribute the 402(g) limit (or any lesser plan limit, which would be rare), then it's not a violation of contingent benefit. I think you are correct in perceiving that some of the earlier posts in this string not have taken the contingent benefit rule at full face value, perhaps because some of its applications don't seem to make sense and perhaps also because it is misunderstood in practice and perhaps more often violated than one might want to think. But that is only speculation on my part.