That was a key point of a recent 409A Webinar during which two industry insiders discussed the upcoming January 1, 2009, compliance date and steps NQDC sponsors can take to get their regulatory house in order.
Blaine Laverick, Senior Vice President, the Principal Financial Group told Webinar host Nevin Adams, PLANSPONSOR editor-in-chief, that it is key that sponsors alert NQDC participants to the January 1 date. Participants need to understand that it will be easier for them to make certain plan changes such as distribution elections during the transition period than after the regulations kick in.
align=”center”> The final 409A regulations are here .
align=”center”> The Webinar slides are available here .
Also, Laverick cautioned, plan sponsors need to review the services they are currently receiving as well as the underlying provider agreements to make sure they will still meet compliance under the new rules. “Make sure you are getting the services you need,” Laverick said.
Generally, said plan adviserMichael W. Kozemchak, Managing Director, Institutional Investment Consulting, an NRP Member Company, NQDC sponsors need to step carefully when designing plans to make sure the result will be compliant. “You really do need to put a lot time into it,” Kozemchak told Webinar participants.
A key design issue to remember, according to Laverick, is that NQDC programs can be aimed at not only generating retirement savings, but to fund other life events such as college expenses or even a second home. Some NQDC plans provide for as many as a dozen buckets of money targeted for specific purposes. “The focus doesn’t have to be just on retirement,” Laverick said. “We have other objectives we may have to address.”
He said it is common to see the larger chunk of a participant’s deferral amount for any of the targeted pots of money coming out of the person’s bonus income rather than base salary. Participants can set up a deferral agreement contingent on the level of their bonus even before they know the size of the bonus, he said. A bonus payment at a certain level would trigger a pre-set deferral limit.
Laverick also reminded sponsors that, when designing plan distribution rules, they need to be conscious of handling vested funds differently than non-vested money. He also called sponsors' attention to a participant's separation of service - particularly the notion that there is no effective difference between an employee who quits and one who retires.
To get around the issue, he said sponsors could impose requirements of a minimum attained age, length of service, or both. A participant meeting those rules could take his money according to his distribution elections, while one who does not qualify under the rules receives a lump sum distribution.
In the area of NQDC financing, Laverick said many companies try to match specific assets to specific plan liabilities including matching how the plan liabilities are invested. That objective of asset-liability matching can get particularly vexing, he said, when participants make an investment option change and trigger the employer's attempt to mirror the move on the asset side of the ledger - for example, moving from one stock fund to another.
Not only do employers have to keep track of such participant decisions ("It's a little bit of a challenge for many organizations," Laverick said.), they may incur additional trading costs by making the corresponding asset-side move and could potentially generate taxable income.
Looking ahead, Laverick said 409A plans have a bright future. Although they are complex, regulators supplied details responding to uncertainty before the final regulations were issued. "Now we have a really good idea of what all this means," Laverick asserted.
In terms of the size of the NQDC market, while pending and existing regulation hampered plan growth in 2005 and 2006, the two panelists said the 409A space was extremely robust in 2007. Final plan formation numbers should reflect an increase for the year, Laverick said.