PLANADVISER - November/December 2019 - 39

fits having been distributed, " she says. The role for advisers
and plan sponsors is to ensure " participants understand the
benefits, and the risks, associated with NQDC plans prior to
a participant enrolling. "
Oftentimes, the adviser is providing education to current
and newly eligible participants during initial and ongoing
enrollment events, she points out. " The adviser can be the
face of education with participants, which can also open
doors to additional business for the adviser. "
Rules for NQDC Plans
According to Currie, the DOL has basically two rules that
NQDC plans must follow. As previously mentioned, the
agency requires that the sponsor of a new NQDC provide
notification of its adoption. The second rule is that plan
eligibility be limited to a select group of management and
highly compensated employees (HCEs). " The DOL has never
defined what that [latter requirement] means, so all we have
to rely on is results of court cases, " Currie observes. NQDC
plans must meet this " top-hat plan " exemption to be free
from the eligibility, vesting, funding and fiduciary requirements
of ERISA. If a court or the DOL finds that the plan
covers more than that specified group, it
can determine the plan is an ERISA plan,
not an NQDC. A true NQDC plan is never
ERISA governed.
There are also two doctrines in NQDC
plans' regulatory landscape, Currie says:
constructive receipt and economic benefit.
With constructive receipt, if the plan
document allows a participant to access
his money at a certain predetermined
time-e.g., when he turns 59 1/2-the IRS
considers the money taxable at that time,
whether he takes a distribution or not.
To avoid constructive receipt, advisers
can help plan sponsors set provisions of
the nonqualified plan in such a way that
distributions will be made only upon a
participant's retirement, termination from
employment or death.
The economic benefit doctrine is more
difficult to understand. Under that, if
an individual receives any economic or
financial benefit or property as compensation
for services,
its value is currently
includible in the individual's gross income,
Currie explains. " To keep a plan in compliance,
we can establish a substantial risk of
forfeiture by having a participant's account
balance subject to the claims of creditors
in the event of an insolvency. "
The final, and most consequential regulatory
element affecting NQDC plans is
Internal Revenue Code (IRC) Section 409A,
Currie says.
Only corporate NQDC plans fall under
B
Section 409A's governance. Other types of nonqualified
plans are subject to other regulations, Souhrada notes.
Those established by for-profit plan sponsors will generally
be subject to 409A. Not-for-profit and governmental plan
sponsors fall under IRC Section 457-their nonqualified plan
is a 457(f) plan-and they are not subject to 409A.
The basic rules under Section 409A are that the plan
must be in writing; it must specify how much compensation
will be deferred; and it must state when distributions
will be made and the form of payment, says Will
Fogleman, an associate at Groom Law Group Chartered in
Washington, D.C.
" Basically, under 409A, an NQDC plan is defined broadly
as compensation or a legally binding right to compensation
that is promised to be paid to participants in a subsequent
plan year, " Fogelman says. " If a plan fails to comply with
409A, the assets are subject to immediate income tax at
the time of failure. All assets are accelerated at the same
time, and a 20% additional penalty tax applies-as well as
an interest penalty on the tax that would have been paid if
the participants had claimed the compensation as income
when it was originally deferred. " -Rebecca Moore
Advising for an NQDC Plan
esides educating plan sponsors and plan participants about the differences
between nonqualified and qualified plans, advisers can be a
valuable support in setting up a nonqualified deferred compensation
(NQDC) plan and finding the right provider for recordkeeping.
" I describe nonqualified plans as a process rather than a product, " says
Phillip L. Currie Jr. of Fulcrum Partners. " We have 300 clients, and no two
plans are identical. " Plan advisers should ask the plan sponsor what it is
trying to accomplish with the plan, which group of employees is most
limited by the employer's qualified plan, to what sources of compensation
can participants defer, and does the sponsor want to fund the plan or not?
The next key thing an adviser can do is help the sponsor find a quality
recordkeeper for the plan, Currie says. Corporate plan sponsors, for instance,
need a recordkeeper with a system built to comply with Internal Revenue
Code (IRC) Section 409A, including controls that will prevent a 409A violation,
he says. " If a plan sponsor uses one of the major recordkeepers, it is
more likely to stay in compliance, and, if there's a mistake, a correction
gets done quickly, " he says. " Where there's a potential for violations is when
a sponsor works with an outside law firm to set up the plan and the chief
financial officer [CFO] is administering the plan on an Excel spreadsheet-
which is actually a common occurrence. "
A strong recordkeeper has not only the proper systems and technology
to support regulations, but the expertise among its staff to guide the adviser
and plan sponsor through the life of the benefit program, says Kathleen
Souhrada of Principal Financial Group.
She says a plan's adviser will also want to conduct periodic reviews
with the sponsor, in concert with the recordkeeper. This way, he can
ensure that the plan, and any funding, is continuing to meet the sponsor's
and participants' needs and that it is adhering to the pertinent rules and
regulations. -RM
planadviser.com November-December 2019 | 39
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