NQDC Plan and Leased Employees/Affiliated Service Groups

We have a situation in which a corporation wants to have a plan for its employees, all of whom are physicians.  We ruled out a qualified plan, because there are a lot of nonphysicians who would be considered leased employees and/or part of an affiliated service group, so any plan for just the physicians would fail nondiscrimination testing.  However, we are now stuck on the question of whether they can have a nonqualified plan. 

The issue is that in order to be a top hat plan, a plan must be for a select group of management or highly compensated employees, and it seems unlikely that a group consisting of all employees could ever be "select."  And while the leased employees and affiliated service group are all treated as part of the same employer for Code purposes, there does not seem to be an analogous provision under ERISA.

Has anyone dealt with this situation?  Any brilliant thoughts on resolving it?

I remember many years ago a court case clarified it must be a select group of, not all.  Your solution is the after-tax plan option.

What type of benefit objective - voluntary employee deferral, employer defined contribution SERP, employer defined benefit SERP?

There are after-tax based alternatives that eliminate your issues – available to anyone or any employee earning $75,000+ and do not perform “blue-collar” roles.

Rather than the traditional 409A structure of an employer creating unsecured promises to select employees and then informally funding with COLI, it makes more sense today for both the employee and the employer to split the funding – the employee owns the COLI priced policy as the lifelong benefit delivery vehicle and the employer separately buys COLI for traditional cost-recovery / key-person objectives.

The problem with 409A is it’s a temporary program – at some time the participant will be paid out and then have to manage the distributions on a taxable basis.  As an individual - Does it make more sense to give away 25%-40% of your investment gains to taxes or 5%-10% of your gains to insurance expenses while receiving added financial protection (terminal illness and death)?  This is why employers are turning to after-tax plans, better participant value, and 409A sponsors are making participants aware of their after-tax option for their personal savings and 409A distributions – executive financial wellness education.

The after-tax plan typically starts with participant education of the COLI product’s role as a more efficient personal investment, cash, tax and risk management container for saving outside a tax-qualified plan and how the employer may be making added contributions for DC or DB SERP purposes.  First determine how much contribution capacity the executive wants then layer the employer contributions.

Lastly, the limiting factor for after-tax plans is insurability.  Don’t jump to simplified or guaranteed issue as these are executive owned.  Keep it fully underwritten medically issued – that 20 minute paramed translates into 15%-20% greater lifetime value to the healthy participants.

Your physician group made this after-tax option possible by increasing the life expectancy of highly compensated “white-collar” risks – their risk rate has significantly lower impact on investment returns than taxes.  And the longer you are expected to live, the greater the benefit of cost-shifting to the after-tax option.

Query whether the client should be spending any time, much less money, exploring NQDC at this moment given the House tax proposal.

Agree.  And with this being the second challenge in four years, perhaps only a matter of time that something happens.  No one knows what.  

With December being deferral election month - tough to recommend someone put more of their compensation at risk.

I'm advocating sponsors and participants use this time of awareness to explore options to accomplish objectives outside the NQDC regulations.  In some areas, better alternatives are available even if nothing happens ever.

You can always structure a deferred bonus arrangement that pays out upon vesting.  As long as the payments are not systematically deferred until retirement, it may not be considered a pension plan and thus not subject to ERISA.  Trying to get employee deferrals into such an arrangement would be problematic (to say the least).  Such an arrangement would likely survive the way the proposed 409B rules are currently drafted.  Since my crystal ball is still in the shop, we don't know what the final version of 409B will look like (heck, we don't know if the final bill will even contain 409B or whether there will even be a final bill enacted), so waiting until all becomes clearer is the best course of action.

I have a feeling that is not the type of QQDCP Carol's client was contemplating, because if it is then chances are there would be no "top hat" concern.

Yeah, I think we can get around the new tax bill (assuming it even gets enacted) by having payout on vesting.  But I'm not sure that gets around the top hat issues.  They are not remotely interested in an after-tax plan.

• Carol, it would depend upon when/how vesting is triggered, wouldn't it?  For example, if vesting is achieved by sticking around until an age close to a typical retirement age, then you probably do have a Title I pension plan and need to be concerned about the top hat issue.  If, on the other hand, for example, you have a rolling 5-year plan (each year's allocation vests 5 years later), then I would say you do not have a Title I pension plan.
• Back to your original question, I have this vague recollection that there is an EBSA advisory opinion addressing 414 affiliation for purposes of the top hat group determination, but assuming I didn't dream it I can't remember the conclusion.  
   

Carol, although your second sentence rules out a qualified plan, have you considered a DB/DC offset arrangement, thus covering most of the benefit for the rank-and-file in the DC plan?  This might allow a fairly large deduction for the HCEs/doctors.

3 hours ago, jpod said:

• Carol, it would depend upon when/how vesting is triggered, wouldn't it?  For example, if vesting is achieved by sticking around until an age close to a typical retirement age, then you probably do have a Title I pension plan and need to be concerned about the top hat issue.  If, on the other hand, for example, you have a rolling 5-year plan (each year's allocation vests 5 years later), then I would say you do not have a Title I pension plan.
• Back to your original question, I have this vague recollection that there is an EBSA advisory opinion addressing 414 affiliation for purposes of the top hat group determination, but assuming I didn't dream it I can't remember the conclusion.  
   

Yes, we could probably do something if we had vesting at a time removed from retirement age.  But when trying to wean them off of the idea of a qualified plan, it's hard to persuade them that they don't want something that pays out at retirement.

I was able to find Advisory Opinion 2008-08A, which allows one filing for a top hat plan that covers more than one member of a controlled group.  However, it does not get into the issue of whether top hat status is determined on an employer or controlled group basis. 

2 hours ago, david rigby said:

Carol, although your second sentence rules out a qualified plan, have you considered a DB/DC offset arrangement, thus covering most of the benefit for the rank-and-file in the DC plan?  This might allow a fairly large deduction for the HCEs/doctors.

We considered that.  But the composition of the workforce in this case is such that we'd either end up cutting way back on the DB benefit for the doctors, or vastly increasing the cost of the DC benefit for everyone else, to meet the nondiscrimination rules.

As a policy matter, not allowing a top hat plan in this situation makes no sense.  For Code purposes, we treat the leased employees as if they were employed by the corporation. If they were, there would be no doubt that the physicians would be a select group of highly compensated employees.  It's hard to see why the physicians should be considered in need of so much more protection in a separate entity than if they were in the same entity as the leased employees.

On 11/8/2017 at 2:15 PM, Carol V. Calhoun said:

We considered that.  But the composition of the workforce in this case is such that we'd either end up cutting way back on the DB benefit for the doctors, or vastly increasing the cost of the DC benefit for everyone else, to meet the nondiscrimination rules.

I assume the comparison is to an existing 401(k) with a match of some sort as the only ER contribution.  I can't imagine that the non-discrimination rules wouldn't allow a straight 3% Safe Harbor cost for a subset of NHCE's that would support doctor deferrals of $18,000 or $24,000 (if 2017) and employer contributions of another $23,850.  What design were they looking at?

On 11/12/2017 at 2:41 AM, Mike Preston said:

I assume the comparison is to an existing 401(k) with a match of some sort as the only ER contribution.  I can't imagine that the non-discrimination rules wouldn't allow a straight 3% Safe Harbor cost for a subset of NHCE's that would support doctor deferrals of $18,000 or $24,000 (if 2017) and employer contributions of another $23,850.  What design were they looking at?

The existing design is a very rich DB plan for the doctors, and a 401(k) for everyone else.  However, no comparability testing has ever occurred, because they have always taken the position that everyone other than the doctors is not employed by the same employer.  We are trying to talk them out of that, and are looking for an alternative that would preserve the existing benefit structure but with the DB plan for the doctors converted to a nonqualified plan.

So the doctors don't want their deferrals plus employer contributions limited to the $47,850.  Nor do they want to make the 3% safe harbor contribution.

I would be interested in an analysis that compares the net effect of a NQ plan to a traditional combo plan.  More specifically, I'd be interested in what statistical gyrations are used to get the analysis even close.  I assume you have told them (or they have seen) the traditional design these days of a cash balance combined with a flat percentage (typically 7.5%) DC plan.  The sooner they accept the traditional design the sooner they can incorporate the DC plan contribution into the overall compensation package and hence not consider it merely a cost to maintain the DB plan.  Good luck.