pension benefits
Print Friendly Version Print Friendly Version

401(k) and Nonqualified Deferred Compensation plans

 

“My client has a 401(k) excess contribution as a result of a failed actual deferral percentage (ADP) test.  However, he was told he could roll over the excess contribution to another of his employer’s plans.  How could that be; I thought excess contributions were ineligible for rollover?”

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 and qualified retirement plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

Highlights of Discussion

  • 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.

 

Conclusion

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.

 

 

© 2017 Retirement Learning Center, LLC

© Copyright 2017 Retirement Learning Center, all rights reserved
401k ira annuity
Print Friendly Version Print Friendly Version

RMDs and More than 5 Percent Owners

“My client’s 401(k) plan allows participants who are not five-percent owners of the company to delay taking their RMDs until after they retire. How is ‘five-percent owner’ defined for RMD purposes?”

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 and qualified retirement plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business.

Highlights of Discussion

•The IRS requires those who are considered “five-percent owners” of the employer to begin their RMD no later than April 1 of the calendar year following the year in which they attain age 70½. For example, if a five-percent owner turns age 70 ½ in 2016, he or she must begin RMDs by April 1, 2017.

•For RMD purposes, a five-percent owner is an employee who is a five-percent owner [as defined in Internal Revenue Section (IRC §416) with respect to the plan year ending in the calendar year in which the employee attains age 70 ½ [Treasury Regulation §1.401(a)(9)-2, Q&A-2(c)].

•Under IRC §416(i)(1)(B)(I), the term “five-percent owner” means the following:

•If the employer is a corporation, any person who owns (or is considered as owning within the meaning of IRC § 318) more than five-percent of the outstanding stock of the corporation or stock possessing more than five-percent of the total combined voting power of all stock of the corporation, or

•If the employer is not a corporation, any person who owns more than five-percent of the capital or profits interest in the employer.

•A person might be a more than five-percent owner through “constructive ownership.” The IRS outlines its constructive ownership rules in IRC § 318. Generally, an individual shall be considered as owning the stock owned, directly or indirectly, by or for his spouse, and his children, grandchildren, and parents.

Conclusion

401(k) plan participants who are more than five-percent owners of the business sponsoring the plan must begin their RMDs no later than April 1 of the year following their age 70 ½ year. Constructive ownership rules could cause a plan participant to be considered a more than five-percent owner for RMD purposes.

© 2016 Retirement Learning Center, LLC

 

 

 

 

 

 

 

 

 

© Copyright 2017 Retirement Learning Center, all rights reserved