IRS revokes "mirror" sec. 401(k) ruling.

• Author: Bowers, Jennifer J.

In Letter Ruling 9414051, the IRS has revoked Letter Ruling 9317037, which would have allowed employers and their highly compensated employees (HCEs) a unique opportunity to maximize contributions to a Sec. 401 (k) plan after the plan year had ended. This ruling would have allowed employers and their HCEs to adjust deferrals and contributions to qualified plans by pairing them with nonqualified deferred compensation plans. Benefits that otherwise would be lost to the HCEs could be restored; the employer could safely comply with the nondiscrimination rules without worrying about potential violations or complications associated with correcting excess deferrals and contributions to a plan.

Letter Ruling 9317037 approved an employer's plan to establish a nonqualified deferred compensation plan covering selected managers and HCEs. The nonqualified plan was to be treated as a grantor trust for tax purposes and the selected employees could make elective salary deferrals, with the employer matching up to 3% of the employee's annual salary. The employer matching in the nonqualified plan mirrored the employer matching available in the company's qualified profitsharing/sec. 401(k) plan.

Each January, the employer would perform preliminary average deferral percentage and average contribution percentage testing for the qualified plan for the prior plan year. if HCEs could have elected a higher deferral percentage for the plan year, they could elect, no later than January 31, to have that additional amount transferred from the nonqualified plan to the Sec. 401(k) plan. Those HCEs who elected not to make the additional deferral contribution would receive that additional amount between March 1 and March 15.

In addition, employer matching contributions to the nonqualified plan would also be transferable to the Sec. 401(k) plan to the extent allowable under the...