401k vs. NQSP

Just received a weird note from my employer based on my income regarding 2016 contributions to 401k.  It says:

2016 401(k) Contributions

·         You can make a $10 ( ten dollar) contribution and

·         If you will reach age 50 by the end of 2016, you may also contribute a catch-up contribution of up $6,000.  If eligible for catch-up contributions in 2016, please send your 2016 catch up contribution instructions to X

2016 Nonqualified Savings Plan Contributions

·         You may contribute up to 50% of your eligible compensation up to a maximum of $50,000.

·         In order to participate in 2016, you must enroll during the NQSP enrollment window. You cannot enroll, suspend or change your 2016 NQSP contribution election after the close of the 2016 NQSP enrollment window.   If you are currently participating in the NQSP, your 2015 contribution elections will not continue into 2016.

Does this sound like they are telling me I cannot contribute to my 401k anymore in 2016? Are they allowed to tell me I can't contribute?

Thoughts on the NQSP? From what I see it isn't a very good substitution. I don't like that it's not protected by the government like a 401k.

I will look into other options like a Roth but I'd love opinions on NQSP and the loss of a 401k only right now.

TIA

I'll add that , yes, I have sent an email to benefits to get clarification but it generally takes them days if not weeks to respond.

$10 or $10k for 2016 in 401k?  Where are you reading that they're killing the 401k?  Nothing you've posted indicates that.   

Are you a government employee?  Is that a 401k or are you calling it that, because it functions similar to a 401k? 401k are not protected by the government.

$10 (ten dollars) not $10,000.  So, that's why I am assuming that they are essentially not allowing me to contribute to a 401k anymore in 2016.  I can put $10 (ten dollars) into it only.  It seems that based on income, they are restricting (essentially eliminating) participation in the 401k. Since this morning, I've been doing some reading on this and it seems there is some federal law that basically states contributions to a 401K have to be balanced by low income.  If low income employees don't contribute at all or do a very small% contribution, but higher paid employees contribute a large %, the 401k essentially becomes "unbalanced" and they can restrict the higher income employees from contributing in any way necessary to achieve the balance.  I'd much rather see them offer a better match to lower income employees to encourage participation but I am sure they are going to take the road that costs them the least $.

The funds in a 401k have a different protection associated with them than this other account.  In bankruptcy, a 401k has a certain level of protection and is high up in order of payout.  This other type of fund (NQSP) is way down there and not distinguished the way a 401k is.

conandrob240 said:
$10 (ten dollars) not $10,000.  So, that's why I am assuming that they are essentially not allowing me to contribute to a 401k anymore in 2016.  I can put $10 (ten dollars) into it only.  It seems that based on income, they are restricting (essentially eliminating) participation in the 401k. Since this morning, I've been doing some reading on this and it seems there is some federal law that basically states contributions to a 401K have to be balanced by low income.  If low income employees don't contribute at all or do a very small% contribution, but higher paid employees contribute a large %, the 401k essentially becomes "unbalanced" and they can restrict the higher income employees from contributing in any way necessary to achieve the balance.  I'd much rather see them offer a better match to lower income employees to encourage participation but I am sure they are going to take the road that costs them the least $.

You are very confussed and confussing.  I recommend that you speak to your HR dept and to a financial advisor regarding this issues.

conandrob240 said:
The funds in a 401k have a different protection associated with them than this other account.  In bankruptcy, a 401k has a certain level of protection and is high up in order of payout.  This other type of fund (NQSP) is way down there and not distinguished the way a 401k is.

If you have income that is high enough to not be able to contribute any more to a 401k, because you have contributed the maximum, why are you so concerned about bankrupcy?

Yes. There are complicated "anti-discrimination" testing rules in the IRS regs (what with the IRS is not complicated) and it appears that you are an employee meeting the classification of "highly compensated". If your company is falling fowl of the rules there is a possibility that the plan may also need to return money you already contributed. 

After a restructuring my company started to have issues with the testing and have converted to a "safe harbor" plan. But that requires a minimum 3% contribution to all employees.

Presumably bankruptcy on the part of the employer/plan sponsor, not personal bankruptcy.

Copihue said:

conandrob240 said:
The funds in a 401k have a different protection associated with them than this other account.  In bankruptcy, a 401k has a certain level of protection and is high up in order of payout.  This other type of fund (NQSP) is way down there and not distinguished the way a 401k is.

If you have income that is high enough to not be able to contribute any more to a 401k, because you have contributed the maximum, why are you so concerned about bankrupcy?

Copihue, you are the confused one (and being a bit rude about it also).

I personally have not contributed the maximum.  This has nothing to do with me individually.  There seems to be some federal rule a company has to follow about 401K contributions. Lower income people have to invest to the 401K at a similar rate to the higher income people.  Meaning if higher income average contribution is 8% and lower income average contribution is 2%, that is in violation of some federal regulation and the company is obligated to rectify it in some way.  Either by encouraging greater participation at lower corp. levels or by restricting folks at higher corporate levels. It seems my company has chosen the latter and, as a result, I will not be able to make ANY contribution at all (except for $10 LOL) to my 401k in 2016. That sort of sucks. At least now I understand the why but still need opinions on this NQSP thing.

And, yes, bankruptcy of the company (although your presumption that a person of higher income wouldn't file bankruptcy is probably way off)

For a 401K to have/maintain its tax-advantaged state, it needs to serve the full company, rather than just the highly compensated part of the company.  Otherwise it would be too easy for employers to have plans that are rigged to only benefit the upper tier of employees, but get significant tax advantages.

When my younger sister managed a large call center, one of her jobs was to explain to entry-level employees why the 401K mattered, and how to enroll.  Her own ability to have a 401K essentially depended on doing this well (and even then, she ended up with a cap, I think, although one that was a fairly high percentage of the maximum).

Don't know much about NQSPs, but I wouldn't put any money in one without a better understanding of what the advantages and risks are. 

Are you familiar with deferred comp plans?  Is a rabbi trust involved (i.e. is the cash held in one?)

Re the NQSP, to help you in making your decision, you need to have a good understanding of the specific rules relating to your employer's plan (vesting, matching, withdrawals, etc.) and how the funds might be invested.  You also need to be confident about the long-term viability of your firm.

The viability is of less concern to me (although, of course, needs to be one factor I consider)- I feel my employment will be much shorter than their viability. But, after the cryptic note this morning, they have sent a detailed guide just now with what seems to be the details of the NQSP so now I have more to go on and can ask the right Qs.

My concern is also around whether this has been triggered by some sort of underlying financial trouble at the company.  is it an indicator of problems?  I ask because I have never heard of this either from my old company or even last year at this company.

(And just in case anyone is thinking this is a problem of rich people proportions the cut off for "high income" was $111,000 last year and seems to be at $120,000 this year. Which I consider nice salary but in now way "rock star" status in our geography.)

ctrzaska said:
Are you familiar with deferred comp plans?  Is a rabbi trust involved (i.e. is the cash held in one?)

Not really and I have no idea what a "rabbi trust" is!

The match (50% on up to 6% contribution) and the vesting (3 years employment until full- I am starting year 2 this month) seems to be the same.  I need to keep reading for the rest...

A NQSP is basically a deferred comp plan from where I sit.  You need to see if your company is holding the cash until separation or whether they're paying you up front and treating that annual distribution as a loan.  The difference is critical to determine options.  If the latter, you need not worry about bankruptcy.  

A rabbi trust provides for segregation of the plan assets outside of the company and should (I think) offer greater protection.  Should be in the plan docs if that's how they're structuring the custody piece.   

My favorite pension geek (who is NOT a 401K expert) thought that highly compensated personnel should be able to participate more, even if lower-paid are under-investing.  

He thought that the average percent-of-income contribution for highly compensated personnel could be no more than 2 percentage points higher than the average percent-of-income contribution of other personnel...so even if lower paid personnel were putting in nothing, that would allow around 2 percent of income, rather than $10.

He could be wrong...outside of his area of expertise, but I'm seeing similar things online.  You may want to dig a bit deeper and understand why you aren't allowed to at least put in something more like 2 percent of income, at minimum.

I can dig all I want but this is what it is. The people identified as high income cannot contribute more than $10 in 2016. It doesn't seem very fair to me and will seriously make me consider my tenure at this company.

And I have until 12/2 to decide not only how much I want to contribute in 2016 but how I want the payout when I leave the company (lump sum vs a few other options). And I am on vacation for 8 days after next week so I have to do this quickly. 

You are right, conandrob240, I was confused, but you are clearer now.  Your company failed the discrimination test, so they made it a safe harbor 401k.  What is a NQSP?  http://money.stackexchange.com/questions/18449/non-qualified-savings-plan-vs-401k-for-highly-compensated-employee.  Is your portfolio tax diversified?  if not, you can take this opportunity to explore if that would be of benefit to you.

a NQSP can take many, many forms.  Read the material very carefully.

so what makes one NQSP better than another? What kinds of things should I be looking for in the materials? I have the details and I understand them but not clear on if this is one of the better plans or not. What's the criteria?

There are many factors, though what makes one preferable to another will generally depend on your particular circumstances and preferences, including your tax situation...it's not like measuring up two mutual funds.

And to add to Max's good advice, you should seek the help of an advisor if you're not comfortable with what you're reading.  MOL is nice for general info, but any determination you make would inevitably need to involve details one wouldn't share on a public forum.  

What you call a NQSO is what I was taught to name a deferred compensation plan.  One benefit for you and for the company is that the deferred comp plan would reduce your income; and if you defer sufficient income so that your reportable income for 2015 is below $120k, you would no longer qualify as a highly compensated employee. You would be able to more freely participate in the company's 401k plan which which is money under your control and not the company's control. 

Non-qualified plans can invest on anything, because as has been stated before, NQs are placed in a trust under the company's name.  Are the assets going to be placed on a Rabbi Trust?  make sure that it is a Rabbi Trust and not something else.  Once in the trust companies generally place the assets in life insurance policies, because then the company doesn't have to pay taxes on the assets every year.  There is a lot of competition for that business, so if they are investing in a life insurance company, and it is a big name company, the assets should be fine.

If they invest in a life insurance policy, is it under your name but held in a trust under the company's name?  if that can be done while still preserving the tax benefit to you now, then ask if you can simply get the policy out of the trust and keep the life insurance policy at the time that you leave the company. Life insurance policies don't grow a lot the first ten years, because there are up front costs and the companies also build in costs that are later returned to the policy owner for the purpose of encouraging you to stay with the policy.  The point is that keeping the policy would be a great benefit to you and your family.  All the up-front costs would be paid, and you would expect to begin to see a great deal of growth in the policy after 10 yrs..  The policy would also give you tax free income at retirement, provided that you never completely remove all the money out of the policy.

If you have to make quick decisions on this issue, I recommend that you speak to my former partner Adam Kazalski https://www.linkedin.com/in/adampwsgroupnj  He does nothing but this, and he has done nothing but this for the past twenty years or so.  If you go to your HR dept, I doubt if they can answer all these questions, specially the life insurance and tax questions.

conandrob240 said:

My concern is also around whether this has been triggered by some sort of underlying financial trouble at the company.  is it an indicator of problems?  I ask because I have never heard of this either from my old company or even last year at this company.

This is not an uncommon situation.  It happens a lot with some businesses that have a few professionals and lots of low skill labor, usually small companies that don't have an HR dept with people who are watching their 401k.  

There are public data bases such as freeerisa.com that will allow you to see the inner workings of your 401k.  There are also data bases for brokers that do all the analysis for you, that is, they let you know what the problems are with the plan:  poor performance, high costs, and violations of ERISA rules. You can ask your financial advisor for that 401k report. 

Didn't you write that your company took care of the issue by making it a safe harbor plan?  

it's actually a huge company but a lot of pt/ contract employees.

I don't think I said anything about safe harbor as I am not really sure what that is.

There is a match of 3% just like the 401k. It's fully vested after 3 yrs of employment. I'm at 14 months now. I have not really delved much further into the details although I have the full document explaining it

You started the thread by saying that this is not as good as a 401k, and you are right, but what are your choices?  

• an IRA, if you qualify, and if you are married and your wife works you are unlikely to be qualified,
• a non-qualified brokerage account where the money is taxable and you will be taxed every year, and 
• a life insurance policy which makes no sense unless you actually need the life insurance (most people are underinsured). 
• would you be allowed to put taxable money into the 401k?  the benefit is the ERISA protections

I agree with what others have said already:  find out in what type of a trust it will be held, (the right answer is Rabbi Trust), and where will be money be held:  I suspect that it will be a permanent life insurance policy.  

I salute you for doing the due diligence, but these questions are very technical, and you need to have someone with the right tools look at the offer and your situation to see if it makes sense for you on an ongoing basis.  There is nothing much that you can do for this year, just accept or reject their offer, but maybe if this is going to continue for many years, maybe finding a new job might not be such a crazy idea.

By the way p/t employees are defined in ERISA as working less than 1,000 hrs in 12 months, and they are not eligible for a 401k. 

To set up the Safe Harbor they would have had to set it up already for 2016.  They would also need to provide a contribution which is 100% vested.  The contribution is either a 3% minimum or a matching contribution with a 4% cap. 

according to my boss, it's been this way ( no 401k) for highly compensated since he started 5 yrs ago. I guess I was able to participate in the 401k for my first year because of when I started or because I just fell through the cracks. Would have been nice to know while I was choosing a company 15 months ago.

I don't see a downside to at least putting some $ in it since there is a match but I definitely need to discuss additional non-company options with a financial planner.

Thanks for trying to help.