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Who is allowed in Non-Qualified plans


Guest RickB

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You can include anyone. But you only get an exemption from key ERISA requirements if particpation is limited to a select group of management or highly compensated employees. No one knows for sure what "highly compensated" means for this purpose. If you have to comply with ERISA, you can't get the tax goodies, so it would be rare that anyone intended to have an ERISA nonqualified plan.

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Guest wmacdonald
Originally posted by RickB

Can Non-Qualified Plans allow non-highly compensated employees in the plan?

You "can't include just anyone". With a lack of definitive guidance from the DOL on what constitues a "top hat" group, most practitioners have come to the conclusion that for non-qualified plan purposes, companies should offer participation in NQDC plans only to "highly compensated and management personnel", and that this group should be limited to no more than 5% to 10% of the company's total employees (IRC 414 (q) definitions are generally not acceptable). However, saying that, the US Court of Appeals for the Second Circuit (Demeryv. Extebank Deferred Compensation (B)___,F.3d___(2d Cir 6-15-00),recently elaborated on the fact that determine wheather a non-qualified deferred compensation plan consitutes an ERISA "top hat plan". The Second Circuit found that the plan was "unfunded" even though COLI was purchased and held in a segreated account on its books. The plan covered 15% of the employees.

I think it makes since to lean more toward 10%, and have a comp limit of at least $100,000. Our survey of the Fortune 1000 (see http://www.crgworld.com) has companies all over the map.

Also, a few years ago, the DOL did state the word "primarily", in "Primarily for a select group of highly compensation and or management employees", doesn't mean you could select others outside the select group.

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Mr. MacDonald has confirmed that you would not WANT to include persons who were not in a select group of management or highly compensated employees, and has provided some additional detail about definitions of those terms, but you CAN include anyone. Furthermore, you could have a top hat plan with a management employee who was not highly compensated (whatever that means). But because we do not have precise definitions (as we do in the tax code) or authoritative guidance, playing around the edges is risky.

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  • 2 weeks later...

What I think we need to keep in mind here is that the regs say a "select group of management" *OR* highly compensated, implying a distinction between the two. The key here, I believe is that the DOL believes the exemption is available only for those in a bargaining position to fend for themselves with respect to benefits. I've seen situations where key management people who were not highly compensated, but because of their positions were influential nonetheless, and therefore would be acceptable participants in a nonqualified plan.

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Guest wmacdonald

[/b]Defining this "select group of highly compensated and/or management personnel" is difficult. Neither ERISA nor the regulations thereunder define the phrase "select group of management or highly compensated employee". In addition the few DOL rulings issued before DOL Advisory Opinion 90-14A concerning the phrase have been withdrawn informally by the DOL and may not be relied on. It is instructive neverthless to examine the way in which the withdrawn rulings and the several cases that have considered the top-hat plan definition have dealt with the various components of the definition.

"Select group". In the withdrawn rulings, the DOL focused on the size of the select group in relation to the employer's total workforce and the select group's average salary in relation to the average salary of the reminder of the employer's workforce. See an example under DOL Adv Op 75-64.

"Or". The term "or" in the phrase management "or" highly compensated also has been the subject of interpretation. The DOL has informally acknowledged that the word is purposely disjunctive rather than conjunctive and, as a result, an employee could be either management or highly compensated and be eligible for coverage under a top-hat plan. The DOL has not, however, announced a formal position on the issue.

"Management". This term also remains undefined. The legislative history of ERISA cites as an example of a top hat plan a deferred compensation plan that was established solely for the officers of a corporation. The DOL has come out with several definitions that they withdrew. Again not clear, however several of these give us some concept of there intention.

"Highly compensated employees". The DOL's position with respect to this term is unclear as well. What is clear is that the highly compensated employee definition of Code Section 414(q)-generally, 5 % or greater owners and those employees with compensation in excess of $80,000-may not be used as a stand in for the ERISA top hat group definition.

"Primarily". ERISA defines a top hat plan as an "unfunded plan maintained by an employer "primarily" for the purpose of providing deferred compensation for a select group of management or highly compensated employees. The DOL has taken the position that the term "primarily" refers to the purpose of the plan-that is, the primary purpose of the plan must be to provide deferred compensation benefits. The DOL stated the term was not to be intended to imply "primarily" composed of highly compensated or management individuals.

As you can see, not very clear, however some bases for determining. You should spend some time in this area, when designing a plan.

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Guest EAKarno

This is the amongst the least definite tax and ERISA areas around. I believe, however, that the previous two answers adequately addressed the issues. My only caveat would be to make CERTAIN that such a plan (one that includes individuals earning below $85K)is very well communicated with ALL risks fully disclosed.

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While I agree that you should communicate the risks, I'm not sure that provides any degree of protection if the company becomes insolvent and everybody loses their benefits. If the court determines that the plan improperly covered some individuals, there will be liability for the breach of fiduciary duty, and the prior disclosures will not prevent any person from being liable.

Kirk Maldonado

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One other point to keep in mind- the top hat rules apply to ERISA pension plans. It may be possible to construct a nonqualified plan that does not constitute a pension plan- ie, does not systematically defer income to termination of employment and beyond. For example, an employer can enter into an agreement with any employee to defer compensation and pay that comp after some period of years (5 to 10 years is generally mentioned as an acceptable period).

card

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Kirk-

I agree. That's why I hedged a bit by saying it may be possible to do so. The facts and circumstances are always important. But there is some room to maneuver.

(In fact I have seen several employers adopt full fledged 401(k) mirror plans on advice of counsel that allow participation to anyone impacted by the 401(k) limits- the only difference from the qualified plan being that the deferral period is limited. Not sure how the Service is viewing these on audit...)

card

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Quote from Kirk' post: "...if the typical term of employment is less than five years"

Of course, many of these plans are covering employees whose expected employment is well more than 5 years. Even if younger employees change jobs often, resulting in average job length of only a few years, the target employees here are usually older and change jobs less often.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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Guest EAKarno

I agree with card's original statement regarding limited time deferral plans. I have seen very definitive opinions from national law firms that support the idea of a deferral plan that limits the deferral to 10 years or less as not being an ERISA retirement plan. This would seem to follow the logic that dictates that SARs (which like options typically have a ten year term) are generally not ERISA retirement plans since they do not "systematically" defer compensation to retirement or termination of employment. As Kirk points out, they may as a matter of fact defer to termination based upon the wrong demographics, however, I would argue that that is circumstantial and not "systematic."

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