The NDCP dirty dozen: An administrative guide to avoiding 12 traps

Introduction

Nonqualified deferred compensation plans (NDCPs) are popular and effective executive benefit plans. However, sponsors must ensure that their plans comply with regulations if they want to avoid paying penalties. In this blog, Milliman consultant Dominick Pizzano identifies 12 areas where some of the most common and costliest administrative errors occur.

Part I – 409A plan recognition
Employers who offer certain types of NDCPs must make sure these arrangements are compliant with Internal Revenue Code Section 409A. Sponsors need to regularly inventory and review their various compensation and benefits agreements to determine if any existing and/or new arrangements are structured in a manner that creates a 409A NDCP. This post highlights some points to consider when conducting the determination process.

Part II – 409A’s documentation decree: Put it in writing
Internal Revenue Code Section 409A requires employers to have a written plan document for each of their NDCPs. This blog discusses what provisions should be specified in the NDCP document to comply with 409A.

Part III – Top hat plans are not one size fits all
Internal Revenue Code Section 409A requires employers to have a written plan document for each of their NDCPs. This blog discusses what provisions should be specified in the NDCP document to comply with 409A.

Part IV – Honor thy 409A grandfather
A review of some rules reminding NDCP sponsors about the importance of preserving their plan’s grandfathered status and some perspective to help sponsors with this maintenance.

Part V – Fathoming FICA: A lifeline for NDCP sponsors and participantsFailure to timely pay correct FICA taxes related to NDCPs can adversely affect NDCP sponsors and participants. This discusses how NDCP sponsors can ensure FICA compliance, avoiding taxes and penalties.

Part VI – 409A deferral election results: A mixed bag
Deferring a participant’s pay under an NDCP seems similar to how such deferrals are handled under a 401(k) plan. However, there are differences that must be observed by NDCP participants and sponsors to comply with regulations. This is a discussion of the differences between 401(k) and NDCP deferral elections. This blog also highlights plan design options that offer participants some flexibility when making NDCP deferral elections with respect to salary and bonuses.

Part VII – Linking NDCPs with 401(k) requires a “contingency” plan for compliance
Some sponsors may consider linking their NDCP benefits with 401(k) plan benefits. In doing so, sponsors must comply with Internal Revenue Code Section 409A as well as the “contingent benefit rule” that is a part of Section 401(k). While such compliance does not directly affect the NDCP, it is a qualification requirement for the 401(k) plan. Here is some perspective.

Part VIII – The NDCP dirty dozen: Timing is everything
NDCP sponsors needs to avoid improper accelerations or delays of participant payments. A failure to do so can result in penalties. This post examines some of the toughest timing tests for the satisfactory operation and administration of NDCPs under section 409A of the tax code.

Part IX – Sponsors and participants must follow 409A true to form
This NDCP blog discusses the rules surrounding the forms of payment that are commonly offered under these plans and examines how sponsors can ensure that their NDCP’s forms are designed and administered to function in compliance with 409A.

Part X – The DB/NDCP funding conundrum
Sponsors are prohibited from “funding” an NDCP for certain highly-paid employees if circumstances arise that either actually or potentially jeopardize their defined benefit (DB) plan’s funding status. This post discusses NDCP funding restrictions and the implications for sponsors and participants.

Part XI – Observing the 409A speed limit on payment accelerations after an NDCP termination
Although sponsors of NDCPs design these high-performance compensation vehicles to ideally deliver their executives all the way to the finish line, sometimes the plans encounter unexpected bumps along the road to retirement that prevent them from running their course. This blog maps out the only 409A-compliant exit routes sponsors may safely take when accelerating payments under their NDCP in conjunction with the plan’s termination.

Part XII – An executive survival guide for tax-exempt employers sentenced to Section 457
IRC Section 457 applicability and compliance still remain sources of confusion and frustration for many not-for-profit employers as they seek to provide significant executive compensation programs. Here is some perspective on Section 457 applicability and compliance.