409A

[Belgarath]

I want to make sure I'm not crazy. 409A DEFERRED income is not included in W-2 compensation for 401(k) plan purposes, right? We've got a payroll company including these deferred wages as eligible income. I could understand it if the employee was receiving taxable PAYMENTS of 409A amounts previously deferred, but this makes no sense at all for income currently being deferred.

Agree/disagree? Thanks.

[QDROphile]

Your plan document should say.

[Peter Gulia]

While there's a range of what a governing document could provide, it seems unlikely an IRS-preapproved document for an individual-account retirement plan would count a 409A deferral within the plan's measure of benefit compensation.

[Belgarath]

Document is a fairly standard document. It includes "Wages, tips, and other compensation on Form W-2." 

I

[QDROphile]

Is that a dispositive answer or is someone unclear on how non qualified deferred compensation is reported?

[david rigby]

Perhaps this is unrelated to the terms of the plan document, but is a problem/error with how this deferral amount is being reflected within the payroll system.  Check to see what system code(s) are being used.  If those codes are correct, then ask the payroll vendor.

[JAA]

Deferred compensation is deducted from gross compensation before 401(k) deferral is calculated.  
https://www.lockton.com/Resource_/PageResource/MKT/Interaction of NQDC with qualified plan.pdf

 

[Belgarath]

Thanks. I just wanted to make sure that nothing had changed. We told the client to contact their payroll company. Payroll company never did this before this year, so it appears just to be an error.

[Luke Bailey]

Actually, this is quite complicated. First, you have to distinguish between deferred comp that is includable BECAUSE of 409A (i.e., the deferral fails 409A, so is includable currently in income under 409A), vs. nonqualified deferred comp that complies with 409A., but that is includable in income in accordance with the deferred comp rules, typically when it is paid.

Further confusion arises from (1) whenever nonqualified deferred comp is paid, its reportable on Form W-2, which leads to an inference that it is going to be comp for 401(k) purposes.

And a final source of potential confusion, even if it is good comp for 401(k) purposes under 415 and 414(s), you have to worry about the 1.415(c)-2(e) timing rules.

So first, any comp that is good under the 415 rules is theoretically going to be good also for 414(s) and may be incorporated into your plan document by virtue of one of the safe harbors. See 1.414(s)-1(c)(2).

Second, 1.415(c)-2(b)(7) says that amounts included because of 409A (i.e., because 409A is not complied with) are includible comp for 415 purposes.

Third, in the much more common scenario where nonqualified deferred comp complies with 409A and so is taxable when paid, not at the time of deferral, it is permissible to include it in comp for qualified plan purposes, under the general 1.415(c)-2 comp definition, and you may include the paid deferred comp in the year it is paid and reported on Form W-2, but only if your plan specifically says so. See 1.415(c)-2, last sentence.

If your plan uses one of the 1.415(c)-2(d)(2) or (3) safe harbors (withholding wages or W-2 reportable wages), then you are typically including 409A-compliant deferred comp in plan comp, subject to the timing rule. In other words, if the participant's withholding wages or W-2 reportable wages include nonqualified deferred comp that was 409A-compliant but was paid during the year, and therefore subject to tax as wages in that year, it is going to be in Box 1 of the individual's W-2, and subject to withholding, for the year, so you next have to determine when it was paid. If, for example, it was deferred with a fixed payment date, and that fixed date of payment has come around and the amount was paid to the individual during the year, while he or she was still employed, then it is includable (again, assuming your plan uses the safe harbor definition). If, on the other hand, you have the more typical situation where the deferred comp is paid to the individual after he or she has separated from service, it will typically not be includable, subject to one very limited exception. The reasons it will typically not be includable are first, because it will often be paid more than 2-1/2 months after separation. Second, even if paid within 2-1/2 months after separation, it will usually fail the 1.415(c)-2(e)(3)(ii) requirements for being regular pay that would have been paid during the year if the employee had not severed employment. However, under 1.415(c)-2(e)(3)(iii)(B), if the amount is paid within 2-1/2 months of severance and the date on which it is paid after severance and within 2-1/2 months of severance is the date on which it would have been paid if the employee had not separated (e.g., again, a fixed date-triggered payment, as opposed to a separation from service-triggered payment), then it is includable.