Deferral Percentage Keyed to 401(k) Matching Contribution

[Christine Roberts]

Is it sufficient for NQ deferred compensation plan drafting purposes that the contribution formula be defined as an amount equal to the difference between (1) 10% of the participant's compensation, and (2)the percentage of compensation allocated on the participant's behalf as a matching contribution under the employer's qualified 401(k) PSP [irrespective of any later corrections or changes to the match as a result of ACP testing]?

Can an employee enter into a sufficently specific salary deferral agreement prior to each plan year, with the contribution expressed in such terms??

[Guest wmacdonald]

Originally posted by Christine Roberts

Is it sufficient for NQ deferred compensation plan drafting purposes that the contribution formula be defined as an amount equal to the difference between (1) 10% of the participant's compensation, and (2)the percentage of compensation allocated on the participant's behalf as a matching contribution under the employer's qualified 401(k) PSP [irrespective of any later corrections or changes to the match as a result of ACP testing]?

I'm not sure what your looking to accomplish, with your formula. Because the plan is non-qualified you have the ability of designing the plan to meet your objectives. Most NQDC plans do make matching contributions to the plan, for the loss of 401 (k) matches (see http://www.crgworld.com for a copy od survey results). As you will notice from the survey, most plans also offer a annual deferral.

[card]

wmacdonald-

Obviously nonqualified deferred compensation plans offer a great deal of flexibility. But you also have to keep in mind the contingent benefit rule under 401(k). That is, a cash or deferred arrangement is a qualified arrangement only if no other benefit is conditioned (directly or indirectly) on the employee's election to make or not make elective contributions. See section 1.401(k)-1(e)(6)(iv).

For example, a nonqualified plan formula that allows a participant to contribute a total of 10% of compensation, split in any way the employee likes between the qualified and nonqualified plans would violate the contingent benefit rule. See example 2 of the reg section cited above.

card

[Guest smithee]

What about a situation where the employee elects a certain percentage of compensation to be deferred under a qualified plan but an administrative error causes a greater percentage to be deferred than is elected. The company also has a non-qualified plan which is a tandem, wrap-around or mirror 401(k) Plan which automatically takes the excess for limits on these contributions under 401(a)(17) and 415. Can the incorrect monies be transferred to the non-qualified plan if it is determined soon after the end of the plan year that a mistake has been made? Why would correction methods for failures to satisfy ADP and ACP tests apply in this situation as it is "failure to follow plan" terms. Anyone have any thoughts?

[Christine Roberts]

Originally posted by card

wmacdonald-

Obviously nonqualified deferred compensation plans offer a great deal of flexibility.  But you also have to keep in mind the contingent benefit rule under 401(k).  That is, a cash or deferred arrangement is a qualified arrangement only if no other benefit is conditioned (directly or indirectly) on the employee's election to make or not make elective contributions.  See section 1.401(k)-1(e)(6)(iv).

For example, a nonqualified plan formula that allows a participant to contribute a total of 10% of compensation, split in any way the employee likes between the qualified and nonqualified plans would violate the contingent benefit rule.  See example 2 of the reg section cited above.

card

Thanks for the cite. In this arrangement, the NQ benefit is dependent upon the employee maxing out his 401(k) deferral (and hence receiving the maximum matching contribution) which, per the last sentence of the reg subsection cited above, seems to be permissible.