Category: Blog

For an NQDC Plan, Being Subject to ERISA May Be A Good Thing

This Sixth Circuit Court of Appeals decision involving a nonqualified deferred compensation plan (NQDC) shows why it can be important for a nonqual plan to comply with Internal Revenue Code Section 409A compliance and the Employee Retirement Income Security Act of 1974 (ERISA) claims procedures.

Fulcrum Partners, a national executive benefits advisory, shares these important insights from attorneys Greg Daugherty and Dave Tumen of Porter Wright, first published: July 31, 2019.

Sixth Circuit Nonqualified Deferred Compensation Plan Decision Highlights Importance of Code Section 409A Compliance and ERISA Claims Procedures

We often receive questions about whether different types of bonus plans and nonqualified deferred compensation plans (NQDC plans) are subject to ERISA. We explain that being subject to ERISA may be a good thing for an NQDC plan, particularly with respect to resolving disputes and claims for benefits. Even if it is questionable whether an NQDC plan is subject to ERISA (i.e., because it arguably does not provide retirement benefits or covers only one person), sometimes it might make sense to include ERISA claims procedures and file a top hat letter. A recent case—Wilson v. Safelite Grp., Inc.—in which the Sixth Circuit held that ERISA preempts state contract and tort law claims, illustrates the benefits of being an ERISA plan.

This case was particularly notable because it also involved violations of Internal Revenue Code Section 409A of the Internal Revenue Code and related guidance (Code Section 409A). While the issue in the case was whether the plan was subject to ERISA, we want to focus on two other important items that may not as easily be noticed. One is the limits of a Code Section 409A “savings clause” in an NQDC plan. The other is the importance of following ERISA claims procedures with respect to NQDC plans.

Code Section 409A Savings Clauses

Most NQDC plans contain what often is called a Code Section 409A “savings clause.” It is a section of the NQDC plan that says that the NQDC plan is intended to comply with Code Section 409A. Code Section 409A imposes penalties on participants in NQDC plans if the NQDC plan document or administration does not comply with strict payment and election timing rules. Those penalties include immediate recognition of deferred income, an additional 20 percent tax on those amounts, and interest equal to the underpayment rate plus one percentage point on the tax deficiency that resulted from not recognizing the deferred income originally. The intended purpose of the savings clause is to make sure that any ambiguity is resolved in favor of a pro- Code Section 409A interpretation.

Ironically, such a “savings” clause will not necessarily save you in the Code Section 409A world. While IRS officials and most practitioners recommend these savings clauses, the IRS still requires that the substantive terms comply with Code Section 409A. If a term a is ambiguous or not clearly defined, a savings clause may tip the balance in favor of a Code Section 409A-compliant interpretation. If, however, a required Code Section 409A term is omitted; a term in the NQDC plan clearly contradicts Code Section 409A; or if the administration of the NQDC plan violates Code Section 409A (regardless of whether the document is compliant), a savings clause (in the IRS’s view) will not override those violations. The IRS likely will still assess penalties, and as mentioned previously, most of those penalties fall on the participant.

That raises a question—if an NQDC plan contains a savings clause that suggested that the NQDC plan complied with Code Section 409A, and either the document or plan administration violated Code Section 409A, could an executive sue his or her employer for breach of contract or a tort in that situation to recover the penalties?

NQDC Plans and ERISA

That was the argument that Dan Wilson, Safelite’s former president and CEO, tried to make. He had participated in Safelite’s nonqualified plan for several years, and when he terminated service with Safelite, his account balance was $9,111,384. The IRS audited Safelite’s NQDC plan and found that Mr. Wilson’s elections under the plan had violated Code Section 409A. Mr. Wilson attempted to sue Safelite for breach of contract and mismanagement of the plan because Mr. Wilson was assessed IRS penalties despite the plan’s language that suggested it was compliant with Code Section 409A.

The District Court held that because the NQDC plan at issue was an ERISA pension plan, ERISA preempted these state law claims. The Sixth Circuit affirmed that decision. The Sixth Circuit decision held that an NQDC plan whose default payment timing was retirement but also allowed earlier in-service payments was an ERISA pension plan that potentially provided retirement benefits. The fact that payments could be made before retirement did not qualify the plan for the bonus program exception to ERISA.

Interestingly, many people’s initial reaction when they hear “ERISA” is to try to find an exemption to ERISA. In many cases, that is understandable. ERISA contains complex rules that prohibit highly compensated employees from benefiting disproportionately compared to non-highly compensated employees, funding requirements, fiduciary rules, and vesting requirements. If a plan is a “top-hat” plan, however, being an ERISA pension plan may actually be beneficial for three key reasons.

  • A “top hat” plan—one whose participation is limited to a select group of management or highly compensated employees—is exempt from many ERISA requirements, such as funding, nondiscrimination in coverage and benefits, vesting and fiduciary rules.
  • A top hat plan is still subject to reporting requirements, but the plan sponsor may satisfy these requirements simply by filing a one-time letter with the Department of Labor.
  • A top hat plan is still subject to ERISA’s claims procedures requirements, which requires an internal review and appeals procedure before a participant may take the claim to litigation. Further, discovery generally is limited to the administrative record developed during the review, and courts tend to be deferential to the internal determinations.

The take-away is that being a top hat ERISA pension plan provides another line of defense for plan sponsors. Mr. Wilson may still recover some or all of the penalties he incurred, but the process would have been easier for him in state court than under the ERISA procedures.

Action Items for NQDC Plan Sponsors

As a response to this decision, we recommend that NQDC plan sponsors take the following actions:

  • Review NQDC plans for compliance with Code Section 409A. It is much better for the employer to catch a mistake early and try to correct it than to have the IRS discover the mistake.
  • Make sure that NQDC plans demonstrate compliance with the applicable ERISA requirements. In particular, make sure that a top hat letter has been filed with the DOL (if applicable), and make sure that the plan has the appropriate claims procedures. If a top hat letter has not been filed, the DOL allows delinquent filings at a fairly small charge. Adding claims procedures could help resolve any potential future litigation much more easily than if there were not claims procedures.
  • Include provisions in the NQDC plan that disclaims responsibility for Code Section 409A violations and requires participants to consult with their own tax advisors regarding how Code Section 409A may affect them.


You can find the original publication of this article by Fulcrum Partners here.

Change is Coming if Your Plan Uses a Limited Scope Audit

The American Institute of Certified Public Accountants, Inc. (AICPA) issued a new statement in July changing the requirements for its members that perform retirement plan audits. Previously, if a large plan utilized the limited scope audit option, the auditor effectively could wash their hands of any information that fell outside of that limited scope.

This new statement eliminates the use of the term “limited scope” and will require that AICPA members who complete plan audits will need to state that information on the financial statements not covered by the certification is fairly presented; and that the investment information contained in the financial statements reconciles with or is derived from information in the bank’s certification.

You might be wondering how these accounting rules modify ERISA. Well, technically, they don’t. But if your auditor is a member of the AICPA, then they must follow these new professional requirements. In addition, these new requirements do seem to reinforce prior guidance from the Department of Labor advising that plan administrators have a fiduciary duty, when opting for a limited scope audit, to ensure that the certification process is a sufficient substitute for an audit of the financial information.

These requirements don’t go into effect until after December 15th of 2020, some plans and auditors will choose to implement them for their next plan audits.

For more information about the new requirements, check out this comprehensive article by The Wagner Law Group.

Back to School… But How Are You Paying for It?

45 million Americans owe $1.48 trillion in student loan debt as of 6/30/19, a +114% increase (up +$790 billion) in just the last 10 years (source: Federal Reserve Bank of New York). We hear from many plan participants that they know they need to save more for their retirement, but they are already stretched to the limit paying for their children’s college tuition.

One way that employers are aiming to help their employees with this challenge is through flexible matching programs. These programs aid employees who have student loan debt or want to create college savings, while still helping them to save for retirement.  One of the best parts is that employers can implement these types of programs without significantly increasing their benefits budget. Employees are simply choosing how to allocate their employer match: to the retirement plan, education expenses, or both.

For more information on flexible matching programs, contact your SRP Managing Director.

SRP October 2019 Plan Sponsor Webinar

Transform Tomorrow: Awakening the Super Saver in Pursuit of Retirement Readiness

Join us on Wednesday, October 19th at 10:00 AM PT/11:00 AM MT/12:00 PM CT/1:00PM ET. Click here to register!

Explore the fundamentals of a society that is grossly under-saving for retirement, the primary forces that are contributing, and the fundamental shift needed to get us back on track. Stig Nybo, will share lessons learned from the writing of “Transform Tomorrow: Awakening the Super Saver in Pursuit of Retirement Readiness;” on how to change saving behavior.

America is facing a monumental “retirement readiness” challenge that can only be overcome by changing the way America thinks about saving for retirement. We will begin by investigating why so many Americans are at risk of outliving their savings and the three critical forces impacting Americans’ preparedness: Longevity; Consumerism; and Leverage. Then move to the solutions that strive to help bring about the changes needed for individuals to reach a secure retirement: New system‐wide contextual drivers; baseline financial literacy: and renewed beliefs around saving vs. spending.

Throughout the presentation, Stig incorporates stories to illustrate key points and uses captivating examples from history to bring the message to life. He borrows from the wisdom of Gandhi, Walt Disney, Mark Twain, Margaret Mead, and even Robin Williams in the Dead Poets Society to make his point. Come enjoy a sobering, yet enjoyable session that aims to change the way you think about planning for retirement.

SRP September 2019 Plan Sponsor Webinar

Equipping Organizations to Win the War for Talent

Join us on September 11, 2019 at 8:30 AM PT / 9:30 AM MT / 10:30 AM CT / 11:30 AM ET. Click here to register.

Tom Chisholm, Managing Director Fulcrum Partners Chicago, and other senior members of the Fulcrum Partners team, will present: “Equipping Organizations to Win the War for Talent.” This insightful overview examines how nonqualified deferred compensation fits into the total rewards strategy of successful organizations.

With 13 offices, coast to coast and over $7 Billion in assets under management, Fulcrum Partners is one of the nation’s largest and leading executive benefits advisories. Wholly member owned, the firm functions independently, flexibly, and responsively. Fulcrum Partners’ clients include medium to large, publicly- and privately-held companies, many that have been clients of the firm’s managing directors for decades. Fulcrum Partners is an Independent Member of the BDO Alliance USA.

What you need to know from the NAPA Fly-In

NAPA’s D.C. Fly-In Forum, was held in July. In its seventh year, the Fly-In is a unique experience for retirement plan focused advisors who are looking to have an impact and engage with key federal policy makers as you advocate for legislative and regulatory policy that affects America’s retirement. Again this year, a number of SRP’s Managing Directors were in attendance.

Here are a few key take-aways from the sessions:

  • State and Local Retirement Policy Update: States like Nevada, New Jersey, and Massachusetts are stepping in to create fiduciary rules, since the DOL rule was vacated.
  • Retirement Plan Lawsuits in 2019: Discussion on the current wave of litigation, such as SDBA, higher education plans, stable value, and rollovers.
  • Tackling the Gig Economy: How to provide benefit coverage for the growing group of those engaged in non-traditional work and the challenges that these benefits may pose for employers.
  • Working with Your Clients and Student Loans: In an era where student loan assistance is one of the most asked about benefits for new employees, this session covered the innovative ideas to help those struggling with student loan and other consumer debt coming from employers, the industry, and Washington, DC.
  • Regulatory Roster: A regulatory agenda update from the DOL covering a wide range of topics such as modernizing participant communications, lifetime income options, missing participants, a forthcoming new proposed fiduciary rule, and plan audits.
  • A Federal Solution to Retirement Access with Rep. Richie Neal (D-MA), Chairman of the House Ways & Means Committee: Rep. Neal shared information on the SECURE act’s progress through capitol hill and how it is proposed to impact retirement savings.

For more information about any of these topics, please contact your SRP Managing Director.

Market Volatility Update

The market has been experiencing some volatility lately, with the DOW recently dropping about 800 points. When this happens, it is disconcerting to investors, both those with a long-time horizon and those with a short one. Particularly to those with a short time horizon.

When it comes to your employee’s retirement plan, it is important that we keep their horizon in mind when discussing any moves that should or should not be made in light of a market correction. Often looking at market moves in this context helps to calm investors down and make fact-based choices vs. emotional ones.

What is causing this current downward move in the market? Certainly, the ramped-up trade war with China has impacted the way the market is looking to the future as well as global unrest, the yield curve and political turmoil here at home. However, corporate earnings and employment remain strong, wages are rising, and the Fed seems to not be over reacting. All of this should help the economy and hopefully soften any correction. With all of this said, the market has had a strong year and corrections are a part of the natural cycle of market growth. Some market pundits believe that volatility and the China trade issues may continue to the next election.

We will continue to monitor your plans investment line up and watch for any signs of trouble. As retirement plan advisors, our goal is to provide you and your employees with the tools and investments to succeed over a long-term, and as such, we search for quality and consistency when providing investment options. By providing a well-diversified line up and the appropriate asset allocation/target date funds, we strive to give you and your employees the tools to save towards a successful future.

Deferred Compensation Agreements Put to the Test …and Holding Strong

Just when everyone thought there was nothing more to be said about the bailout issues of the subprime mortgage crisis (2007-2010), it’s back in the headlines. Some 23 former American International Group Inc (AIG) Financial Products (AIGFP) employees[i] have taken their old employer to court. At stake is more than $100 Million in deferred compensation the employees said was contractually owed and verbally promised. This past Tuesday, British court Judge Andrew Baker added support to their battle, ruling that AIG couldn’t use what the Judge described as “abusive arguments” to block the payments.

Bloomberg Business quoted AIG Financial Products Chief William Dooley as having said in a court filing, “the insurance giant would have ‘been under extreme pressure’ from the U.S., especially from an angry Federal Reserve Chairman Ben Bernanke, to stop the payouts and pursue bankruptcy instead.”

Back when governments, both U.S. and European, were bailing out banks and insurers, the Federal Reserve loaned $85 Billion to AIG, with a stipulation that no funds would be distributed out of AIGFP’s bonus pools as those funds should not be “used to reward executives ahead of taxpayers.”

Aside from an obvious but unaddressed argument that the executives involved were taxpayers themselves, the money owed had been set aside as deferred compensation to the former traders and managers to provide them “a sharing of the risks and rewards of the business.”

According to the, “Even as AIGFP realized losses totaling $40 billion in late 2008, ‘the language (of the deferred comp agreements) required for the restoration of payments.’”

AIG is expected to file an appeal with a higher court, arguing that while the company was still losing money, it didn’t have to pay the Financial Products employees their bonuses.[ii]

The courts, it seems, are not being swayed by AIG’s arguments, but are instead siding with the employees, recognizing that contracts are in place to be honored, even when a company would rather not. Earlier this year, a French court ordered AIG[iii] to pay bonuses of more than $2.3 Million to a former managing director at AIG Management France SA, and last year awarded roughly $7.6 Million to another managing director in France.

Thank you to Fulcrum Partners for this great article, which you can also view here on their website.





Self-Directed Brokerage Accounts within a 401(k) Plan? Issues Plan Sponsors Should Address

The typical 401(k) plan sponsor offers a mutual fund lineup of around 20 funds to invest personal and company contributions, and, even with that level of flexibility, hands-on investors are likely asking for more options. The Profit Sharing Council of America reports that the percentage of 401(k) plans with self-directed brokerage accounts (SDBAs) is growing, now above 20%.

401(k) plans with SDBAs offer a significant benefit to their participants, greater flexibility in investment options: more types of investments to choose from, more asset classes available including alternative asset classes such as real estate and commodities, and with certain plans, access to lower-cost investments. This greater flexibility in investment options offers plan participants more diversification and more refined investment strategies across all of their personal investment accounts. It also allows participants to hold relatively tax-inefficient investments in their 401(k) plan account, reducing their current annual tax bill.

The typical hands-on investor among your participants usually earns more, works with a personal financial planner and has more personal wealth, and that is often a good description of the company’s leaders. In addition, these hands-on investors might also be part of your plan’s retirement committee. But, SDBAs within a 401(k) plan are not for everyone. What issues should a plan sponsor consider if they are looking to add or expand the SDBA accounts available in their 401(k) plan?

Fiduciary Considerations and Participant Impact

If the plan sponsor has not implemented SDBAs to date as an investment option for participants, then the first issue to address or questions to answer are:

  • Is adding an SDBA feature really necessary.
  • Should the plan sponsor consider their participant group first, then their fund lineup?
  • How big is the group of hands-on investing participants and are they asking for more flexibility?
  • Are there asset classes that can be added to the current fund lineup to accomplish the objective?

A conversation with your investment advisor and current recordkeeper may result in enhancements to your investment lineup that satisfy the needs of your participants while maintaining a relatively simple and fully automated investment lineup for your plan.

The flip side of your hands-on investor group is the general makeup of your eligible participant population.  Recognize that the Department of Labor requires that all participants must be given the right to invest their 401(k) account through a self-directed brokerage account if the plan offers this feature. As a result, all eligible participants must be notified of the SDBA option, including related fees and account charges.

We know that many participants should stay away from self-directing their retirement accounts; they lack the time, discipline or willingness to do it themselves through ongoing research and actions to effectively manage their SDBA. They may be unwilling to hire an advisor due to cost, they may have an incomplete understanding of risk and return in asset classes, and they may engage in emotional investing, all leading to poor investment outcomes. The latest Charles Schwab SDBA Indicators Report bears this out:  it showed that participants who work with an advisor have higher balances, a more diversified asset mix, and less exposure to individual stocks than non-advised participants.

Also, the Department of Labor has expressed concerns regarding the range of investments that should be made available due to risk and return, reasonableness of fees charged by an advisor, and using investments through the brokerage window. ERISA Section 404(c) has a specific exclusion for investments where the risk of loss exceeds the participant’s account balance.

Carefully evaluating the participant group may cause some plan sponsors to limit investments in SDBAs to only a percentage of the total account, and restrict or prohibit investments in limited or general partnerships, options, futures and other derivatives, margin trading and other forms of investments with potential risk.

Finally, choosing the broker and negotiating the broker’s fees and other charges may be a fiduciary act, particularly if the fiduciary is limiting the number of advisors and brokerage firms available to one or a select few.

Plan sponsors and named fiduciaries may be under the impression that implementing self-directed brokerage accounts minimizes fiduciary risk, but there can still be fiduciary obligations that if not met, can trigger liability.  Beyond ongoing fiduciary risks, there can be significant operational issues that are unique to 401(k) plans with SDBAs.

Operational Issues

Historically, self-directed brokerage accounts have been a feature of 401(k) plans sponsored by law firms and medical practices, but these plans have now become much more prevalent across US employers, although with restrictions on the brokerage firm and advisors available.

As the recent Charles Schwab survey indicates, plan participants with larger account balances prefer to work with a professional advisor, specifically a personal investment advisor who knows their full financial picture and participates in their lifetime financial planning. If plan participants can select their own investment advisor for their accounts, maintaining the plan becomes more complex and more expensive to administer.

More Complexity 

Many recordkeepers and administrators have developed their own automated and proprietary solution for self-directed brokerage accounts, catering to larger employers who represent the majority of plan sponsors offering a self-directed brokerage account option in their plan. A single brokerage firm approach for self-directed brokerage accounts significantly limits the investment advisors available to the participant, so this approach is unlikely to work for participants with larger balances, who also often are the key leaders within the organization.

Allowing those key leaders to work with their personal investment advisor forces the benefits team or administrative staff to manually maintain these separate accounts, involving a number of additional steps, many or all of them manual:

  • Excluding participants with outside brokerage firms from the payroll feed and deposits to the recordkeeper for the rest of the plan,
  • Separate checks or electronic transfers to each individual brokerage firm,
  • Logging all transactions and verifying receipt with each individual brokerage firm,
  • Resolving any issues that arise with the individual brokerage firm,
  • Providing separate, aggregate reporting of all plan participants for compliance testing, and
  • Even taking on the role of the plan’s recordkeeper in developing personal plan statements for each participant with a separate self-directed brokerage account, summarizing annual activity in the plan account.

In this manual environment, those participants who self-direct through a separate brokerage firm are ‘off-line’:

  • They do not have access to an online 401(k) participant portal
  • Participant service and support is provided by the employer’s internal staff
  • May not receive a participant summary statement (an ERISA requirement) unless it’s provided by the plan sponsor.

More Expensive

The manual processes involved in working with multiple brokerage firms creates additional internal expense and additional compliance and fiduciary risk for the organization that chooses to work around their recordkeeper’s limitations. The plan sponsor may also incur additional hard dollar expense by hiring its accountant or another third party administrator to consolidate and summarize the assets held across all accounts for the plan in total and reconcile to participant accounts, a necessary step for completing the plan’s Form 5500 annual disclosure filing. Also, if the plan sponsor’s 401(k) plan has more than 100 participants, this expense becomes an annual, necessary expense for a full scope audit as required by ERISA when there is no certified trust statement covering all assets held by the plan.

At Last – Resolving Issues with a Single Solution

When choosing to add or expand the availability of SDBAs in a 401(k) plan, it can feel like, “No good deed goes unpunished”. But, solutions are available that offer greater flexibility to participants at reasonable cost and reduced fiduciary risk. Solutions such as Professionals Choice Retirement PlanTM simplify the multi-vendor approach, allocate plan fees judiciously, and offer participants complete investment freedom to utilize their personal financial advisors. This open architecture personal advisor solution enables fiduciary management with fully- transparent and outsourced professional 401(k) plan administration. Plan sponsors should have a conversation with their investment advisor, their recordkeeper and other advisors to understand what solutions are available that best meet both plan sponsor and participant objectives.*


*Investment advisory services provided via Professionals Choice Retirement Plan are offered through Strategic Retirement Partners (SRP), an SEC registered investment advisor. Findley provides administrative and recordkeeping services, is not a broker/dealer or an investment advisor and is a separate entity from SRP. SRP and Findley are separate entities from LPL Financial.

August 2019 Participant Webinar

Will you please share the following announcement within your organization by copying and pasting this to your participants?

Attention all Retirement Plan Participants and Eligible Employees! Register now for the next event in the 2019 SRP Participant Education Webinar Series!

One Dollar. One Percent. One Future You.
Can “ONE” really make a difference?
Whether you’re new to the 401(k) or simply want to review the benefits of saving within your workplace retirement plan, we invite you to join SRP’s Ann-Marie Sepuka (Managing Director – Houston) to discuss what makes these plans so valuable and break it down into the actual dollars and cents everyone can relate to. She’ll also explore the immense power of visualization, and help you get to know the person you’re saving for…the future you!

Plan Participants and Eligible Employees: Join us via webinar on Tuesday, August 6 @ 1:00 EST / 12:00 CST / 11:00 MST / 10:00 PST.
Register in advance:
Even if you cannot attend the meeting live, a recording will be made available to all registrants.



Securities offered through LPL Financial, Member FINRA/SIPC. Investment advisory services are offered through Global Retirement Partners, an
SEC Registered Investment Advisor. Global Retirement Partners and Strategic Retirement Partners (SRP) are separate entities from LPL

Global Retirement Partners employs (or contracts with) individuals who may be (1) registered representatives of LPL Financial and investment
adviser representatives of Global Retirement Partners; or (2) solely investment adviser representatives of Global Retirement Partners. Although
all personnel operate their businesses under the name Strategic Retirement Partners (SRP), they are each possibly subject to differing
obligations and limitations and may be able to provide differing products or services.