is there such a thing as a NQDC Plan for all employees (not limited to top hat folks)?

[mariemonroe]

My understanding is that the advantage of qualifying as a top hat plan is that the plan is exempt from certain ERISA requirements.

Is it possible to have a NQDC that complies with the ERISA requirements requirements but is not a qualified plan?

Has anyone ever seen one?

[CuseFan]

Yes, you can have a nonqualified retirement plan that is not a top-hat plan, but you do have to comply with ERISA requirements for things like vesting and putting assets in trust and probably a number of other things. What you don't need to comply with are IRS coverage and nondiscrimination rules, but any tax deferral you want to accomplish is subject to deferred comp rules, and probably 409A now as well. I have been around a long time and do not recall actually ever seeing one of these but do remember getting very infrequent inquiries with the conclusion they were not worth the trouble.

[QDROphile]

You might find that there is not really much tax deferral to be had once you comply with the ERISA rules and amounts vest.  So what are you trying to accomplish? 

[John Feldt ERPA CPC QPA]

A governmental employer’s 457(b) plan -is that what you’re looking for?

[MoJo]

15 hours ago, CuseFan said:

Yes, you can have a nonqualified retirement plan that is not a top-hat plan, but you do have to comply with ERISA requirements for things like vesting and putting assets in trust and probably a number of other things. What you don't need to comply with are IRS coverage and nondiscrimination rules, but any tax deferral you want to accomplish is subject to deferred comp rules, and probably 409A now as well. I have been around a long time and do not recall actually ever seeing one of these but do remember getting very infrequent inquiries with the conclusion they were not worth the trouble.

I believe we used to call these "excess benefit plans" and were used when participants hit a plan or regulatory limits.  Haven't seen one in years, as the limits have increased to or beyond the ability of non-Top Hat group members capabilities....  

[CuseFan]

Those are very specific plans which have similar ERISA exemption, although usually the participants are the top-hat crowd anyway even if not required. Also, people incorrectly lump all limits for excess benefit plans, such as the compensation limit. I believe these are limited to just contributions or benefits that would exceed the 415 limit, which limits their utility.

[fmsinc]

It sounds like these NQDC plans are funded in some way.  Is that right?  Are they required to comply with a QDRO?  

[Peter Gulia]

Part 2 of subtitle B of title I of ERISA does not apply to “a plan which is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees[.]” ERISA § 201(2), unofficially compiled as 29 U.S.C. § 1051(2) http://uscode.house.gov/view.xhtml?req=(title:29%20section:1051%20edition:prelim)%20OR%20(granuleid:USC-prelim-title29-section1051)&f=treesort&edition=prelim&num=0&jumpTo=true

The command: “Each pension plan shall provide for the payment of benefits in accordance with the applicable requirements of any qualified domestic relations order.” is in ERISA § 206(d)(3)(A), 29 U.S.C. § 1056(d)(3)(A) http://uscode.house.gov/view.xhtml?req=(title:29%20section:1056%20edition:prelim)%20OR%20(granuleid:USC-prelim-title29-section1056)&f=treesort&edition=prelim&num=0&jumpTo=true.

So, an ERISA-governed unfunded deferred compensation plan that meets the select-group conditions need not provide anything about a domestic-relations order.

ERISA does not require anything of a church plan that has not elected to be ERISA-governed.

ERISA does not require anything of a governmental plan.

I serve and have served as counsel for plans that do not pay or provide anything to a participant’s former spouse (or separated spouse).

[david rigby]

On 1/6/2022 at 6:12 PM, QDROphile said:

So, what are you trying to accomplish? 

This is the correct question.  So far, unanswered.

[mariemonroe]

The client is trying to accomplish the following:

• The client wants to make an annual contribution to a plan for all employees. 
• The contribution will be allocated amongst employees to in proportion to their compensation.
• The employees' contributions will grow in accordance with the company's top line growth.
• Employees can ask for payout whenever they want it.

The client's main goal is to offer this type of plan to all employees and not just to the management.

[BenefitJack]

You asked: 

My understanding is that the advantage of qualifying as a top hat plan is that the plan is exempt from certain ERISA requirements.  Correct, see prior responses. 

Is it possible to have a NQDC that complies with the ERISA requirements requirements but is not a qualified plan?  Yes, all NQDC plans are not "qualified plans".  

Has anyone ever seen one?  See for example:  https://secure02.principal.com/publicvsupply/GetFile?fm=BB12491&ty=VOP&EXT=.VOP   and   https://www.plansponsor.com/research/2021-nqdc-survey/

To add some texture to those answers.  

Profit Sharing:  Perhaps you are thinking of a cash profit-sharing plan?  Look at Delta Airlines for 2019 results, 2020 payment.  Some employers stretch out payments over a period of years (no voluntary election by the worker).  In one of my prior employers, they had a three year payout for a specific incentive plan.  Say an individual earns $45,000 as a bonus for 2021 performance.  The bonus amount is determined in January (based on prior year's corporate, business unit, department, etc. and sometimes individual performance) and $15,000 is paid before March 15, 2022, with equal installments of $15,000 paid in 2023 and 2024.  Some years, there would not be an award.  Again, see Delta Airlines for 2020 results, no payment in 2021.     

NQDC That is Not a Top Hat:  Or perhaps you mean a NQDC plan that permits associate deferrals of regular wages or other incentive payments, but does not qualify as a pension plan, and therefore is not subject to ERISA.   Generally, Section 3(2) of ERISA defines a “pension plan” to be any plan, fund, or program established or maintained by an employer which (1) provides retirement income to employees OR (2) results in a deferral of income for periods extending to the termination of covered employment or beyond. Under this definition, some but not all, deferred compensation plans are subject to ERISA.  And, those that are subject to ERISA because they permit deferral until separation or later into retirement generally must meet the "top hat" requirements. 

Long ago (35+ years), I created a NQDC plan that was not a "pension plan" nor a "top hat" plan - it only allowed for a period of deferral for 1 to 10 years (e.g., money earned in 2022 could be deferred to any year between 2023 and 2032, and the payout could be for 1 to 10 years.)  So, the range was, for money deferred from 2022, a full payout of all deferrals and any "earning" in 2023 up to deferral from 2022 to commence in 2032, with payments stretched out over a maximum of 10 years (2032 to 2041)).  The deferral election, including the payout election, had to be made by 12/31 of the calendar year prior to the calendar year of earnings.   It was kind of a "class year" structure.  So, in this example, to defer money earned in 2022, the election would have to have been received by 12/31/21.  Later, 409A came along and, generally speaking, this non-qualified deferred compensation plan structure already met many of the 409A requirements. 

See:  https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/about-us/erisa-advisory-council/towarnicky-102220.pdf

These remarks are provided for informational purposes only.  This information is provided from a practitioner with knowledge and experience in the industry and not as a legal or tax opinion or advice.  The issues presented here may have tax and legal implications, and you should always discuss these matters with your legal and tax counsel prior to choosing a course of action.  This presentation is not (and you/others should not use it as a substitute for) legal, accounting, actuarial, or other professional advice.  
 

 

[BenefitJack]

You originally asked: 

My understanding is that the advantage of qualifying as a top hat plan is that the plan is exempt from certain ERISA requirements.  Correct, see prior responses. 

Is it possible to have a NQDC that complies with the ERISA requirements requirements but is not a qualified plan?  Yes, all NQDC plans are not "qualified plans".  

Has anyone ever seen one?  See for example:  https://secure02.principal.com/publicvsupply/GetFile?fm=BB12491&ty=VOP&EXT=.VOP   and   https://www.plansponsor.com/research/2021-nqdc-survey/

Per your followup: 

The client is trying to accomplish the following:

• The client wants to make an annual contribution to a plan for all employees.   Possible.
• The contribution will be allocated amongst employees to in proportion to their compensation.  Possible.
• The employees' contributions will grow in accordance with the company's top line growth.  Possible.  
• Employees can ask for payout whenever they want it.  Probably need to have the individuals schedule the payouts in advance - perhaps in installments.    

Investments, Rate for Crediting Earnings While Deferred?  

To add some texture to those answers.  

Profit Sharing:  Perhaps you are thinking of a cash profit-sharing plan?  Look at Delta Airlines for 2019 results, 2020 payment.  Some employers stretch out payments over a period of years (no voluntary election by the worker).  In one of my prior employers, they had a three year payout for a specific incentive plan.  Say an individual earns $45,000 as a bonus for 2021 performance.  The bonus amount is determined in January (based on prior year's corporate, business unit, department, etc. and sometimes individual performance) and $15,000 is paid before March 15, 2022, with equal installments of $15,000 paid in 2023 and 2024.  Some years, there would not be an award.  Again, see Delta Airlines for 2020 results, no payment in 2021.   This appears closest to what you are trying to accomplish.  Generally, income is taxable for FICA and FICA-Med as earned, taxable for income taxes when paid.     

NQDC That is Not a Top Hat:  Some employers have adopted a NQDC plan that permits associate deferrals of regular wages or other incentive payments, but does not qualify as a pension plan, and therefore is not subject to ERISA.   Generally, Section 3(2) of ERISA defines a “pension plan” to be any plan, fund, or program established or maintained by an employer which (1) provides retirement income to employees OR (2) results in a deferral of income for periods extending to the termination of covered employment or beyond. Under this definition, some but not all, deferred compensation plans are subject to ERISA.  And, those that are subject to ERISA because they permit deferral until separation or later into retirement generally must meet the "top hat" requirements. 

Long ago (35+ years), I created a NQDC plan that was not a "pension plan" nor a "top hat" plan - it only allowed for a period of deferral for 1 to 10 years (e.g., money earned in 2022 could be deferred to any year between 2023 and 2032, and the payout could be for 1 to 10 years.)  So, the range was, for money deferred from 2022, a full payout of all deferrals and any "earning" in 2023 up to deferral from 2022 to commence in 2032, with payments stretched out over a maximum of 10 years (2032 to 2041)).  The deferral election, including the payout election, had to be made by 12/31 of the calendar year prior to the calendar year of earnings.   It was kind of a "class year" structure.  So, in this example, to defer money earned in 2022, the election would have to have been received by 12/31/21.  Later, 409A came along and, generally speaking, this non-qualified deferred compensation plan structure already met many of the 409A requirements. 

See:  https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/about-us/erisa-advisory-council/towarnicky-102220.pdf

Tax-qualified Plan - Thrift/Savings, 401k, or Traditional Profit Sharing.  Not sure why they wouldn't want to use a tax-qualified plan.  With respect to employer contributions, all are generally deductible (within limits), there is a significant limit on annual additions (no more than $61,000 in 2022 (all DC plans combined), all avoid FICA taxes (employee and employer), an allocation that is a function of direct compensation is generally permitted, and after a modest period of years (generally 5 years), taxable payouts are possible.  Until then, assuming that the employer vests the worker 100% immediately in the employer contribution, a participant could take a plan loan (can generally borrow $1 for $1 up to the first $10,000).  

These remarks are provided for informational purposes only.  This information is provided from a practitioner with knowledge and experience in the industry and not as a legal or tax opinion or advice.  The issues presented here may have tax and legal implications, and you should always discuss these matters with your legal and tax counsel prior to choosing a course of action.  This presentation is not (and you/others should not use it as a substitute for) legal, accounting, actuarial, or other professional advice.  
 

 

[Linda Wilkins]

I think this should be drafted as an incentive or bonus plan.  It's not an ERISA pension plan because it does not "systematically defer" payouts until  termination of covered employment which is the ERISA pension plan definition under section 3(2)(A).  There's a good blog on this topic at https://www.winston.com/en/executive-compensation-blog/guest-blog-is-your-bonus-plan-subject-to-erisa.html 

Analyzing this as a deferred compensation arrangement or bonus plan, it fails to comply with Code section 409A because it allows payouts upon request, rather than fixing payment dates by reference to events (separation from service or change in control) or fixed dates.

[mariemonroe]

What about a simple phantom equity plan for all employees. The phantom stock vests immediately but can only be cashed out upon certain events (such as a liquidity event for the company)?

Does that sound like a "pension plan" implicating ERISA or a "deferred compensation" plan implicating 409A?

[Luke Bailey]

11 hours ago, mariemonroe said:

What about a simple phantom equity plan for all employees. The phantom stock vests immediately but can only be cashed out upon certain events (such as a liquidity event for the company)?

Does that sound like a "pension plan" implicating ERISA or a "deferred compensation" plan implicating 409A?

There are a lot of plans out there like this. If it only pays out on a c-in-c or other "liquidity event," then, although facts and circumstances, and opinions, may differ (a) it is probably not an ERISA plan because defers compensation until a liquidity event, not the end of employment, and (b) if the payout is a lump sum, it would probably (depending on how drafted) qualify for the short-term deferral exception the the application of Section 409A's other rules (i.e., its rules other than for determining what is a short-term deferral). Again, there are a lot of plans like that out there, in various forms. The chief problem with them in my view is figuring out what to do if someone makes a real contribution to an increase in the company's value, and stays long enough to be vested, but leaves, other than for cause, before there is a liquidity event, including on account of retirement, disability, or death. Do you cash that person out for their vested interest to the point of termination, based on an appraisal or formula? Do they keep the interest in retirement until there is a liquidity event? Does it go to their estate if they die before a liquidity event? Does it go away if, for example, there is no c-in-c within 5 years? But again, there a lot of plans like this out there, so those questions have not stopped folks from doing these, and usually a liquidity event comes along before the issue comes up.

[Kevin Bachler]

Hello Marie Monroe,

Very quickly, I have nearly 35 years of VP or above level of experience at two of the largest NQDC specialists. 

I have bad news and good news.

First, the bad news: 

Assuming the situation involves a for-profit company, NO you CANNOT have an NQDC that is not a TOP HAT plan - thereby allowing you to cover a broad group of employees. If your plan doesn't meet TOP HAT requirements, it will cause the plan to be treated as ERISA plan which means any assets earmarked for the plan would cause it to be funded for ERISA purposes. This would certainly trigger ERISA's concept of "beneficial ownership interest", which in turn would trigger the IRS' concept of economic benefit or of constructive receipt - meaning your participants would be taxed currently. This would lead to violations of 409A, penalties, interest, etc. etc., and the biggest fear if you have more than 30 such participants, the possibility of a class action lawsuit for the taxes and penalties each participant would have.

A bad deal.

Over 90% of companies with revenues of $750MM and up have deferred compensation plans at this point. And such a plan may be good for your company.

Now the good news:
While you cannot have an nqdc to accomplish this, you CAN accomplish it through a compensation program. The design can be similar to an NQDC, but it must appropriately not be tied to retirement, so that it is a compensation program and not a retirement program. So, it is "do-able", but with some extra details, care and design. You might even be able to administer it with your NQDC, so long as you are careful about the overall plan design and administration.