Source: https://retirementlc.com/tag/nonqualified-deferred-compensation/
Timestamp: 2019-04-21 01:29:25+00:00

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ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings plans, including nonqualified plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with a financial advisor from Massachusetts is representative of a common inquiry related to nonqualified deferred compensation plans.
While there is no one comprehensive program like EPCRS for the correction of failures for IRC § 409A nonqualified deferred compensation plans (409A plans), the IRS has issued a series of notices containing pre-approved correction methods for certain operational failures and document noncompliance issues for such plans [IRS Notices 2008-113, 2010-6, 2010-80 and 2007-100 (which employers can follow in lieu of Notice 2008-113 for pre-2009 operational errors)]. Following the correction methods can help participants reduce or delay early taxation of their deferred compensation and avoid penalties.
If a business with a 409A plan fails to operate the plan in accordance with the requirements of IRC §409A, affected participants may become subject to current income taxation of their deferred compensation, as well as have interest and penalties assessed. Generally, all amounts that are deferred under a noncompliant 409A plan for the taxable year and all preceding taxable years are includable in gross income for the taxable year, unless the amount is subject to a substantial risk of forfeiture or has previously been included in gross income. The IRS assesses interest on such amounts included in income at the IRS underpayment rate plus one percent, and applies a 20 percent penalty. Moreover, state and local tax rules and penalties may apply. The IRS has issued proposed regulations [Treasury Regulations Section 1.409A-4(a)(1)(ii)(B)] on how to calculate the amount of income to include when a failure occurs.
IRS Notice 2008-113 covers corrections for 409A operational failures, including, but not limited to, failures to defer amounts, excess deferrals, incorrect payments, and the correction of exercise prices. The guidance of IRS Notice 2010-6 allows businesses to correct many types of 409A plan document errors, including impermissible definitions of separation of service, disability or change in control; impermissible payment events or payment schedules; impermissible payment periods following a permissible payment event; impermissible initial or subsequent deferral election procedures; and a failure to include the six-month delay of payment for specified employees of publicly traded companies. Please note that IRS Notice 2010-80 modifies certain provisions of Notices 2008-113 and 2010-6, and should be referred to for the latest guidance.
Plan sponsors can refer to the IRS’ Nonqualified Deferred Compensation Audit Techniques Guide for issues the IRS focuses on when auditing businesses that offer 409A plans.
The IRS has issued a series of notices containing pre-approved correction methods for certain operational failures and document noncompliance issues for 409A plans. Following the correction methods can help participants reduce or delay early taxation of their deferred compensation and avoid penalties.
ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with a financial advisor from Ohio is representative of a common inquiry involving plan types.
A 415(m) plan is a type of nonqualified deferred compensation plan offered by public employers (e.g., state and local governments and their agencies, including public schools, colleges and universities). The technical title for these plans is “qualified governmental excess benefit arrangement” under Internal Revenue Code Section [IRC § 415(m)].
415(m) excess benefit plans are generally used to allow eligible public employees to set aside contributions over and above the contribution/benefit limits of IRC §415 that apply to qualified plans. The sponsoring institution owns the assets but the employees have a vested interest in the benefits. In the event of employer bankruptcy, assets are subject to the claims of the employer’s creditors.
Although, a 415(m) plan is a type of nonqualified deferred compensation plan, it is not subject to the IRC §409A rules for income inclusion for such plans. It is treated as if it were a nonqualified plan of a for-profit corporation.
For participant taxation purposes, pre-IRC §409A rules apply, specifically, those found under IRC Sec. 83 (related to the value of transferred property for the performance of services); IRC Sec. 451 (pertaining to the constructive receipt of income; and the Economic Benefit Doctrine (where taxation occurs in the year that assets are unconditionally and irrevocably paid into a fund or trust to be used for the employee’s sole benefit).
In addition to having a type of qualified plan available to them, employees in the public sector may also have access to 415(m) excess benefit plans, which allow them to set aside amounts over the usual plan limits.
You are correct; 401(k) excess contributions are not eligible to be rolled over to an “eligible retirement plan” pursuant to Internal Revenue Code Section (IRC §) 402(c)(8)(b). The term eligible retirement plan is defined as an individual retirement account under IRC §408(a); an individual retirement annuity under IRC § 408(b); a qualified trust; a qualified annuity plan under IRC § 403(a); a governmental plan under IRC §457(b); and an IRC §403(b) plan.
However, it is possible that, in addition to the 401(k) plan, your client’s employer maintains a plan that is not an eligible retirement plan, such as a nonqualified deferred compensation plan (NQDC) under IRC §409A.
An NQDC plan is an agreement, method, or arrangement between an employer and an employee (or service recipient and service provider) to pay the employee or independent contractor compensation in the future for service presently performed. NQDC plans allow employees to defer compensation until retirement or some other predetermined date. A thorough discussion of NQDC plans is beyond the scope of this writing.
NQDC plans are an attractive benefit for highly paid employees because they are free from the contribution limits, participation requirements and nondiscrimination restrictions that apply to qualified plans. Because NQDC plans are not subject to the limitations of qualified retirement plans, they can allow some executives and high-level managers to defer a much larger portion of their compensation than permitted under qualified plans.
If permitted under the terms of the plan document, participants may have the option to contribute to the NQDC their excess contributions that occurred in their 401(k) plans. These NQDC plans may be referred to as “401(k) excess plans” or “401(k) wrap plans.” The contribution to the NQDC plan is not a rollover, but is considered an additional type of permissible deferral under the NQDC plan.
A best practice would be to get a copy of the NQDC plan document and check to see if there is language in the plan that addresses the ability of participants to defer excess contributions. The consultants at the Learning Center review NQDC plans documents, as well as other types of plan documents, daily.
While 401(k) participants may not roll over excess contributions to another eligible retirement plan, it may be possible for them to defer their excesses into a NQDC or 401(k) wrap plan, if one exists. Check the NQCD plan document for accommodating language.

References: § 409
 §409
 § 415
 §415
 §409
 §409
 §408
 § 408
 § 403
 §457
 §403
 §409