W-2 reporting of non-qual/401(k) wrap plan following year end.

[Guest dhancock]

Hello,

I have a practical, procedure question regarding a 401(k)/Non-Qual Deferred comp. Wrap plan.

In a Wrap scenario, an HCE can defer into the non-qual plan, and then can decide how much of the non-qual deferral the HCE can place into his/her 401(k) account. The problem is that by the time ADP testing is complete for a year end, the HCE's W-2 for the year of deferrals has usually been completed (by Jan. 31).

So, if the HCE decides to go ahead and execute the "pour-over" from the non-qual to the 401(k), how would this be reported on the W-2? Where on the W-2 would one list the amount that has gone from the non-qual into the 401(k)? I guess an amended W-2 is required?

Any thoughts would be greatly appreciated. Thanks in advance.

[Guest EAKarno]

Well, since it is going to be FICA reportable in either case, I guess it doesn't really matter whether it is reported as 401(k) deferred income or nonqualified. To be safe, I would just make sure to be consistent.

Eric A. Karno, JD

[Guest]

I disagree. How are you able to "reallocate" after the close of the calendar year. The W-2 is supposed to reflect compensation as of 12/31.

Further, how would you meet the DOL deposit requirement of January 15 for what is supposed to be a Dec 31 contribution?

[Guest EAKarno]

Whether the money remains in the 401(k) plan or is "poured over" into the nonqualified plan, it is earned and reportable for FICA purposes by 12/31. Go ahead and put it in the 401(k) by 1/15 and then refund it to the nonqualified plan before 3/15 and there is no problem. So, it duznt mattah!

[pjkoehler]

EAKarno is right in the sense that the "pour over" from the NQDC to the 401(k) plan does not affect the amount reported for FICA wage taxation on Form W-2 (Boxes 5-6). It also doesn't affect the amount reported as wages or the amount of FIT withheld (Boxes 1 and 2). However, Box 13 would be affected since it is designed, among other things, to report the aggregate elective deferrals to a 401(k) plan (Code "D"). So, if the employer has issued W-2s by the January 31 deadline and subsequently determines the "pour over" amount, it will probably have to issue corrected W-2s to increase the elective deferrals to the 401(k) plan reported in Box 13. This, of course, has no impact on the employer's income or FICA tax withholding or the employee's FICA tax liability. Therefore, even if the affected employees filed their individual returns on the basis of the initial W-2. i.e. before the "pour over" amount is determined, they wont have to file amended returns.

If the thought of issuing corrected W-2s each year to the affected HCEs is troublesome, you might consider performing the ADP testing using prior year data and prior year HCE head counts, to reduce the risk that a projection of the end of year test results will deviate significantly from the final results. [Edited by PJK on 08-22-2000 at 09:11 PM]

[Guest dhancock]

Thanks to PJK and EAKarno for your replies.

b2Kates - the 401(k)/Non-qual Wrap plan is intentionally designed to allow an HCE to "store" his/her deferral in a plan until the non-disc testing is complete on the 401(k) plan. This allows the HCE to know how much more he/she can put into the 401(k) plan without causing the plan to fail. Of course, as PJK mentions, this same result could also be achieved by using a Prior Year testing method.

So basically, the DOL's 15 day timely deposit rule isn't really applicable in this case - the employee deferral was already deposited into the non-qual plan in a timely fashion. Any later pour over to the 401(k) isn't bound by the 15 day rule.

Additionally, the non-qual plan is just that - a non qualified plan. As such, it is exempt from many ERISA provisions.

As for the W-2 reporting, I arrived at the same conclusion as PJK and EAKarno about it really not making a difference since it will all be subject to FICA anyway. Of course for accuracy, Box 13 should be changed to show the additional 401(k) contribution.

But there is also a box where the deferral into a non-qual plan is reported (I think it is Box 5 or 6). This box should be reduced by the amount of the pour over, or else the amount stated as non-qual deferral will be overstated. This really isn't a big deal, except that if it is ever determined that the non-qual assets become subject to tax (i.e. the non-qual assets are deemed to be no longer subject to forfeiture), then someone will have a tough time explaining that they should be taxed on an amount that is less than that amount reported on their W-2.

[pjkoehler]

dhancock, Form W-2 actually doesn't report elective deferrals to a NQDC plan. Box 11, which you may be thinking of, reports distributions from such plans. Box 13 has no Code for NQDC elective deferrals, which is logical since these plans must be unfunded, otherwise the deferrals would be includible in Box 2 as wages.