Non-Qualified Plan -> FAFSA -> EFC

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
DoubleComma
Posts: 567
Joined: Sun Aug 23, 2020 2:23 pm

Non-Qualified Plan -> FAFSA -> EFC

Post by DoubleComma »

I can’t be the first to try to figure this out, but I can’t seem to find anything searching the forum or the web in general.

It’s clear that 401k and related pre-tax retirement deductions are added back into ones income on the FAFSA for the purpose of calculating EFC.

How does non-qualified plan deferrals impact FAFSA and EFC?

I would expect it functions like the income was never earned.

Like a 401k it’s optional, unlike a 401k the deferred income is NOT held in an account I own or control…and there is a risk the deferred income is lost forever.

Before I finalize my 2022 NQP instructions I would like to know how it impacts EFC.
Topic Author
DoubleComma
Posts: 567
Joined: Sun Aug 23, 2020 2:23 pm

Re: Non-Qualified Plan -> FAFSA -> EFC

Post by DoubleComma »

I guess this is an unknown. Little surprised a BH hasn’t experienced this yet.
fabdog
Posts: 1789
Joined: Wed Jan 16, 2013 1:59 pm
Location: Williamsburg VA

Re: Non-Qualified Plan -> FAFSA -> EFC

Post by fabdog »

When I went in to fill it out this year, it had changed... now it asks if parents net worth is > $5.6 million... if not no further asset questions

They also have a help line you can call at 1-800-433-3243. Not sure if front line folks will answer

I recall from foggy memory a few years back that even though plan was non qualified, i didn't own it, even though I was "fully vested" I could not access it, so it didn't go in the asset pile

Mike
User avatar
HueyLD
Posts: 8464
Joined: Mon Jan 14, 2008 10:30 am

Re: Non-Qualified Plan -> FAFSA -> EFC

Post by HueyLD »

DoubleComma wrote: Sun Oct 10, 2021 8:26 pm I can’t be the first to try to figure this out, but I can’t seem to find anything searching the forum or the web in general.

It’s clear that 401k and related pre-tax retirement deductions are added back into ones income on the FAFSA for the purpose of calculating EFC.

How does non-qualified plan deferrals impact FAFSA and EFC?

I would expect it functions like the income was never earned.

Like a 401k it’s optional, unlike a 401k the deferred income is NOT held in an account I own or control…and there is a risk the deferred income is lost forever.

Before I finalize my 2022 NQP instructions I would like to know how it impacts EFC.
I found a Q&A on the NYT from year 2011. I am not sure if the rules are still the same. You may want to call the college to confirm.

“ A nonqualified deferred compensation plan allows for payments to start after an employee retires or is terminated from the company. The contributions may be elective or nonelective, and the contributions may or may not be included in the employee’s taxable income.

Nonelective contributions may be subject to vesting requirements. In the case of a rabbi trust, the contributions are not currently taxable to the employee because the trust is subject to the claims of the employer’s creditors.

But generally, since the deferred compensation plan is not qualified, it must be reported as an asset on the Fafsa and any elective contributions to the plan must be reported as untaxed income to the extent that they are not included in AGI. Only report as an asset the amounts that have vested.

Appeal to the college for a professional judgment review after you’ve submitted the Fafsa. Some colleges will consider a deferred compensation plan as similar to a 401(k) or pension plan, and treat it similarly. But some will not, especially if your husband will have access to the funds before the normal retirement age or if the amount of money in the nonqualified plan is substantial.”

https://thechoice.blogs.nytimes.com/201 ... -a-part-4/
lazynovice
Posts: 2067
Joined: Mon Apr 16, 2012 10:48 pm

Re: Non-Qualified Plan -> FAFSA -> EFC

Post by lazynovice »

Logic would say that the election is voluntary so the income should be added back and the asset is unvested and should be excluded. But logic may not matter.
“I didn’t want my sailboat to be in the driveway when I died.” Nomadland
Soon2BXProgrammer
Posts: 2737
Joined: Mon Nov 24, 2014 11:30 pm

Re: Non-Qualified Plan -> FAFSA -> EFC

Post by Soon2BXProgrammer »

HueyLD wrote: Mon Oct 11, 2021 10:24 am
DoubleComma wrote: Sun Oct 10, 2021 8:26 pm I can’t be the first to try to figure this out, but I can’t seem to find anything searching the forum or the web in general.

It’s clear that 401k and related pre-tax retirement deductions are added back into ones income on the FAFSA for the purpose of calculating EFC.

How does non-qualified plan deferrals impact FAFSA and EFC?

I would expect it functions like the income was never earned.

Like a 401k it’s optional, unlike a 401k the deferred income is NOT held in an account I own or control…and there is a risk the deferred income is lost forever.

Before I finalize my 2022 NQP instructions I would like to know how it impacts EFC.
I found a Q&A on the NYT from year 2011. I am not sure if the rules are still the same. You may want to call the college to confirm.

“ A nonqualified deferred compensation plan allows for payments to start after an employee retires or is terminated from the company. The contributions may be elective or nonelective, and the contributions may or may not be included in the employee’s taxable income.

Nonelective contributions may be subject to vesting requirements. In the case of a rabbi trust, the contributions are not currently taxable to the employee because the trust is subject to the claims of the employer’s creditors.

But generally, since the deferred compensation plan is not qualified, it must be reported as an asset on the Fafsa and any elective contributions to the plan must be reported as untaxed income to the extent that they are not included in AGI. Only report as an asset the amounts that have vested.

Appeal to the college for a professional judgment review after you’ve submitted the Fafsa. Some colleges will consider a deferred compensation plan as similar to a 401(k) or pension plan, and treat it similarly. But some will not, especially if your husband will have access to the funds before the normal retirement age or if the amount of money in the nonqualified plan is substantial.”

https://thechoice.blogs.nytimes.com/201 ... -a-part-4/
The issue is there is a whole slew of types of NQDC plans. Some plans, are purposely not vested and unsecured liabilities of the corporation, and the employee is at risk of not receiving the money. They actually never received the income, and it will be taxed when it is distributed.

I would argue there is vagueness in the questions in the fafsa and how some of the NQDC plans work. contributions to a NQDC plan are not "untaxed income' in the eyes of the IRS, because it isn't income until its paid out. It also isn't your asset, because after initial election you can NOT have control over the payment. (with some minor exceptions). The best way I can describe it is that you have a contract to be paid later with interest

I am unaware of any public rulings on this topic, as most of the time people who have access to a NQDC aren't going to get college aid anyways.
Earned 34 (and counting) credit hours of financial planning related education from a regionally accredited university, but I am not your advisor.
Topic Author
DoubleComma
Posts: 567
Joined: Sun Aug 23, 2020 2:23 pm

Re: Non-Qualified Plan -> FAFSA -> EFC

Post by DoubleComma »

Soon2BXProgrammer wrote: Mon Oct 11, 2021 11:01 am
HueyLD wrote: Mon Oct 11, 2021 10:24 am
DoubleComma wrote: Sun Oct 10, 2021 8:26 pm I can’t be the first to try to figure this out, but I can’t seem to find anything searching the forum or the web in general.

It’s clear that 401k and related pre-tax retirement deductions are added back into ones income on the FAFSA for the purpose of calculating EFC.

How does non-qualified plan deferrals impact FAFSA and EFC?

I would expect it functions like the income was never earned.

Like a 401k it’s optional, unlike a 401k the deferred income is NOT held in an account I own or control…and there is a risk the deferred income is lost forever.

Before I finalize my 2022 NQP instructions I would like to know how it impacts EFC.
I found a Q&A on the NYT from year 2011. I am not sure if the rules are still the same. You may want to call the college to confirm.

“ A nonqualified deferred compensation plan allows for payments to start after an employee retires or is terminated from the company. The contributions may be elective or nonelective, and the contributions may or may not be included in the employee’s taxable income.

Nonelective contributions may be subject to vesting requirements. In the case of a rabbi trust, the contributions are not currently taxable to the employee because the trust is subject to the claims of the employer’s creditors.

But generally, since the deferred compensation plan is not qualified, it must be reported as an asset on the Fafsa and any elective contributions to the plan must be reported as untaxed income to the extent that they are not included in AGI. Only report as an asset the amounts that have vested.

Appeal to the college for a professional judgment review after you’ve submitted the Fafsa. Some colleges will consider a deferred compensation plan as similar to a 401(k) or pension plan, and treat it similarly. But some will not, especially if your husband will have access to the funds before the normal retirement age or if the amount of money in the nonqualified plan is substantial.”

https://thechoice.blogs.nytimes.com/201 ... -a-part-4/
I am unaware of any public rulings on this topic, as most of the time people who have access to a NQDC aren't going to get college aid anyways.
This is the crux of the whole thing. My oldest is still 24+ months before entering college so I'm looking at things I can do to prevent this door from being shut.

Let me be clear, I'm not looking for a way take needs based scholarships that should rightfully go to families with fewer resources. We are interested in maximizing merit based, my child is a top 1% student in their class, very involved in athletics, leadership and other clubs. Getting into a great college is unlikely to be an issue. However, its becoming clear out of state universities are attractive due to the impacted nature of CA UCs. Now what is becoming for clear is tuition breaks to off -et out of state vs in state occasionally require FAFSA. If there is something we can do now short of fraud to better position for out of state normalization to in state tuition we would like to do do.
Soon2BXProgrammer
Posts: 2737
Joined: Mon Nov 24, 2014 11:30 pm

Re: Non-Qualified Plan -> FAFSA -> EFC

Post by Soon2BXProgrammer »

DoubleComma wrote: Mon Oct 11, 2021 12:15 pm
Soon2BXProgrammer wrote: Mon Oct 11, 2021 11:01 am I am unaware of any public rulings on this topic, as most of the time people who have access to a NQDC aren't going to get college aid anyways.
This is the crux of the whole thing. My oldest is still 24+ months before entering college so I'm looking at things I can do to prevent this door from being shut.

Let me be clear, I'm not looking for a way take needs based scholarships that should rightfully go to families with fewer resources. We are interested in maximizing merit based, my child is a top 1% student in their class, very involved in athletics, leadership and other clubs. Getting into a great college is unlikely to be an issue. However, its becoming clear out of state universities are attractive due to the impacted nature of CA UCs. Now what is becoming for clear is tuition breaks to off -et out of state vs in state occasionally require FAFSA. If there is something we can do now short of fraud to better position for out of state normalization to in state tuition we would like to do do.
Let me be clear, my comment was about need based aid... however merit aid is regularly awarded regardless of FAFSA EFC.

Also are you aware of the "prior prior rule for the FAFSA"? you should look up what years count for which years of your childrens school.

A lot of school require the FAFSA because their MERIT formula might be Merit aid to fill the gap above need based aid up to XYZ dollars. So they want people to have filled out the fafsa to see if they get need based aid. So the actual end result of the FAFSA doesn't matter, because the MERIT fills the gap.. So do your best and fill out the form, knowing you aren't going to get NEED based aid.

One can do a bunch of planning work but some takes longer then the time you have, but if your income is high, your income is high, and that is very hard to work around, regardless of time. when people's income is high enough, it doesn't make sense to try to optimize anything.
if low enough, what people do don't matter, it is the edge people that optimization has a huge benefit.

Regarding breaks for out of state tuition, that is very school policy based. also be aware there are tuition reciprocity agreements that aren't awarded unless you apply for them:
https://msep.mhec.org/about
They exist in multiple parts of the country. But most of them you have to apply for.
Also, they normally exist to facilitate exchange between flagship schools... University of washington has a great dentist program and U Hawaii has a marine biology program. WA and Hawaii say that they will give each other students discounts for these programs as they dont' exist in the other's school.. This is a fictitious example, but programs like this exist.
Earned 34 (and counting) credit hours of financial planning related education from a regionally accredited university, but I am not your advisor.
Topic Author
DoubleComma
Posts: 567
Joined: Sun Aug 23, 2020 2:23 pm

Re: Non-Qualified Plan -> FAFSA -> EFC

Post by DoubleComma »

Soon2BXProgrammer wrote: Mon Oct 11, 2021 1:08 pm
DoubleComma wrote: Mon Oct 11, 2021 12:15 pm
Soon2BXProgrammer wrote: Mon Oct 11, 2021 11:01 am I am unaware of any public rulings on this topic, as most of the time people who have access to a NQDC aren't going to get college aid anyways.
This is the crux of the whole thing. My oldest is still 24+ months before entering college so I'm looking at things I can do to prevent this door from being shut.

Let me be clear, I'm not looking for a way take needs based scholarships that should rightfully go to families with fewer resources. We are interested in maximizing merit based, my child is a top 1% student in their class, very involved in athletics, leadership and other clubs. Getting into a great college is unlikely to be an issue. However, its becoming clear out of state universities are attractive due to the impacted nature of CA UCs. Now what is becoming for clear is tuition breaks to off -et out of state vs in state occasionally require FAFSA. If there is something we can do now short of fraud to better position for out of state normalization to in state tuition we would like to do do.
Let me be clear, my comment was about need based aid... however merit aid is regularly awarded regardless of FAFSA EFC.

Also are you aware of the "prior prior rule for the FAFSA"? you should look up what years count for which years of your childrens school.

A lot of school require the FAFSA because their MERIT formula might be Merit aid to fill the gap above need based aid up to XYZ dollars. So they want people to have filled out the fafsa to see if they get need based aid. So the actual end result of the FAFSA doesn't matter, because the MERIT fills the gap.. So do your best and fill out the form, knowing you aren't going to get NEED based aid.

One can do a bunch of planning work but some takes longer then the time you have, but if your income is high, your income is high, and that is very hard to work around, regardless of time. when people's income is high enough, it doesn't make sense to try to optimize anything.
if low enough, what people do don't matter, it is the edge people that optimization has a huge benefit.

Regarding breaks for out of state tuition, that is very school policy based. also be aware there are tuition reciprocity agreements that aren't awarded unless you apply for them:
https://msep.mhec.org/about
They exist in multiple parts of the country. But most of them you have to apply for.
Also, they normally exist to facilitate exchange between flagship schools... University of washington has a great dentist program and U Hawaii has a marine biology program. WA and Hawaii say that they will give each other students discounts for these programs as they dont' exist in the other's school.. This is a fictitious example, but programs like this exist.
Thanks for all the information. It is the "prior prior" rule that has me asking this now. I can better manage 2 full years pre-enrollment now so I want to take action today if it matters.
Soon2BXProgrammer
Posts: 2737
Joined: Mon Nov 24, 2014 11:30 pm

Re: Non-Qualified Plan -> FAFSA -> EFC

Post by Soon2BXProgrammer »

DoubleComma wrote: Mon Oct 11, 2021 1:30 pm
Soon2BXProgrammer wrote: Mon Oct 11, 2021 1:08 pm
DoubleComma wrote: Mon Oct 11, 2021 12:15 pm
Soon2BXProgrammer wrote: Mon Oct 11, 2021 11:01 am I am unaware of any public rulings on this topic, as most of the time people who have access to a NQDC aren't going to get college aid anyways.
This is the crux of the whole thing. My oldest is still 24+ months before entering college so I'm looking at things I can do to prevent this door from being shut.

Let me be clear, I'm not looking for a way take needs based scholarships that should rightfully go to families with fewer resources. We are interested in maximizing merit based, my child is a top 1% student in their class, very involved in athletics, leadership and other clubs. Getting into a great college is unlikely to be an issue. However, its becoming clear out of state universities are attractive due to the impacted nature of CA UCs. Now what is becoming for clear is tuition breaks to off -et out of state vs in state occasionally require FAFSA. If there is something we can do now short of fraud to better position for out of state normalization to in state tuition we would like to do do.
Let me be clear, my comment was about need based aid... however merit aid is regularly awarded regardless of FAFSA EFC.

Also are you aware of the "prior prior rule for the FAFSA"? you should look up what years count for which years of your childrens school.

A lot of school require the FAFSA because their MERIT formula might be Merit aid to fill the gap above need based aid up to XYZ dollars. So they want people to have filled out the fafsa to see if they get need based aid. So the actual end result of the FAFSA doesn't matter, because the MERIT fills the gap.. So do your best and fill out the form, knowing you aren't going to get NEED based aid.

One can do a bunch of planning work but some takes longer then the time you have, but if your income is high, your income is high, and that is very hard to work around, regardless of time. when people's income is high enough, it doesn't make sense to try to optimize anything.
if low enough, what people do don't matter, it is the edge people that optimization has a huge benefit.

Regarding breaks for out of state tuition, that is very school policy based. also be aware there are tuition reciprocity agreements that aren't awarded unless you apply for them:
https://msep.mhec.org/about
They exist in multiple parts of the country. But most of them you have to apply for.
Also, they normally exist to facilitate exchange between flagship schools... University of washington has a great dentist program and U Hawaii has a marine biology program. WA and Hawaii say that they will give each other students discounts for these programs as they dont' exist in the other's school.. This is a fictitious example, but programs like this exist.
Thanks for all the information. It is the "prior prior" rule that has me asking this now. I can better manage 2 full years pre-enrollment now so I want to take action today if it matters.
While not DIY the tool these people built and the data they have is pretty good depending on the part of the country your in
https://capstonecollegepartners.com/

There is a different website for consumers to buy advicebut I don't remember at the moment
Earned 34 (and counting) credit hours of financial planning related education from a regionally accredited university, but I am not your advisor.
hellokitty
Posts: 3
Joined: Tue Oct 12, 2021 9:34 am

Re: Non-Qualified Plan -> FAFSA -> EFC

Post by hellokitty »

fabdog wrote: Mon Oct 11, 2021 9:29 am When I went in to fill it out this year, it had changed... now it asks if parents net worth is > $5.6 million... if not no further asset questions

They also have a help line you can call at 1-800-433-3243. Not sure if front line folks will answer

I recall from foggy memory a few years back that even though plan was non qualified, i didn't own it, even though I was "fully vested" I could not access it, so it didn't go in the asset pile

Mike
May I ask about the ">$5.6 million" question? I got a similar response and was astonished that I didn't have to report any assets. I am guessing that is based on income and parents' ages?
Soon2BXProgrammer
Posts: 2737
Joined: Mon Nov 24, 2014 11:30 pm

Re: Non-Qualified Plan -> FAFSA -> EFC

Post by Soon2BXProgrammer »

hellokitty wrote: Tue Oct 12, 2021 9:40 am
fabdog wrote: Mon Oct 11, 2021 9:29 am When I went in to fill it out this year, it had changed... now it asks if parents net worth is > $5.6 million... if not no further asset questions

They also have a help line you can call at 1-800-433-3243. Not sure if front line folks will answer

I recall from foggy memory a few years back that even though plan was non qualified, i didn't own it, even though I was "fully vested" I could not access it, so it didn't go in the asset pile

Mike
May I ask about the ">$5.6 million" question? I got a similar response and was astonished that I didn't have to report any assets. I am guessing that is based on income and parents' ages?
do you have any screenshots of this? I haven't seen this question before... and i don't see a reference in the guide/application

https://studentaid.gov/sites/default/fi ... -fafsa.pdf
https://fsapartners.ed.gov/sites/defaul ... aGuide.pdf
Earned 34 (and counting) credit hours of financial planning related education from a regionally accredited university, but I am not your advisor.
hellokitty
Posts: 3
Joined: Tue Oct 12, 2021 9:34 am

Re: Non-Qualified Plan -> FAFSA -> EFC

Post by hellokitty »

I don't. The screen came after the parents' income section. I'm learning that I must have gone below the threshold, and therefore got the "no need to report assets" screen. This was very unexpected, but we are a one-income family of 4 and we parents are on the upper age-range end.
Soon2BXProgrammer
Posts: 2737
Joined: Mon Nov 24, 2014 11:30 pm

Re: Non-Qualified Plan -> FAFSA -> EFC

Post by Soon2BXProgrammer »

hellokitty wrote: Tue Oct 12, 2021 2:36 pm I don't. The screen came after the parents' income section. I'm learning that I must have gone below the threshold, and therefore got the "no need to report assets" screen. This was very unexpected, but we are a one-income family of 4 and we parents are on the upper age-range end.
lower then 50k agi? page 4 and 5 of this document talk about the simplified method:
https://fsapartners.ed.gov/sites/defaul ... aGuide.pdf
Earned 34 (and counting) credit hours of financial planning related education from a regionally accredited university, but I am not your advisor.
hellokitty
Posts: 3
Joined: Tue Oct 12, 2021 9:34 am

Re: Non-Qualified Plan -> FAFSA -> EFC

Post by hellokitty »

Soon2BXProgrammer wrote: Tue Oct 12, 2021 3:18 pm
hellokitty wrote: Tue Oct 12, 2021 2:36 pm I don't. The screen came after the parents' income section. I'm learning that I must have gone below the threshold, and therefore got the "no need to report assets" screen. This was very unexpected, but we are a one-income family of 4 and we parents are on the upper age-range end.
lower then 50k agi? page 4 and 5 of this document talk about the simplified method:
https://fsapartners.ed.gov/sites/defaul ... aGuide.pdf
Thanks for this.
Soon2BXProgrammer
Posts: 2737
Joined: Mon Nov 24, 2014 11:30 pm

Re: Non-Qualified Plan -> FAFSA -> EFC

Post by Soon2BXProgrammer »

hellokitty wrote: Wed Oct 13, 2021 6:57 am
Soon2BXProgrammer wrote: Tue Oct 12, 2021 3:18 pm
hellokitty wrote: Tue Oct 12, 2021 2:36 pm I don't. The screen came after the parents' income section. I'm learning that I must have gone below the threshold, and therefore got the "no need to report assets" screen. This was very unexpected, but we are a one-income family of 4 and we parents are on the upper age-range end.
lower then 50k agi? page 4 and 5 of this document talk about the simplified method:
https://fsapartners.ed.gov/sites/defaul ... aGuide.pdf
Thanks for this.
Np. make sure you are careful about all the what is allowed/not allowed on your tax return to qualify for that... (simple example i think if you make HSA contributions, then you are NOT allowed).

Furthermore, Congress has already passed a huge reform of the FAFSA:
viewtopic.php?t=334631
There are significant changes to how people can qualify for the equivalent of a simplified method. You should be aware of the rules for the future, also the timing of these changes is not exactly known, so some people are trying to qualify under both sets of rules.
Earned 34 (and counting) credit hours of financial planning related education from a regionally accredited university, but I am not your advisor.
tenkuky
Posts: 1670
Joined: Sun Dec 14, 2014 4:28 pm

Re: Non-Qualified Plan -> FAFSA -> EFC

Post by tenkuky »

Soon2BXProgrammer wrote: Tue Oct 12, 2021 2:18 pm
hellokitty wrote: Tue Oct 12, 2021 9:40 am
fabdog wrote: Mon Oct 11, 2021 9:29 am When I went in to fill it out this year, it had changed... now it asks if parents net worth is > $5.6 million... if not no further asset questions

They also have a help line you can call at 1-800-433-3243. Not sure if front line folks will answer

I recall from foggy memory a few years back that even though plan was non qualified, i didn't own it, even though I was "fully vested" I could not access it, so it didn't go in the asset pile

Mike
May I ask about the ">$5.6 million" question? I got a similar response and was astonished that I didn't have to report any assets. I am guessing that is based on income and parents' ages?
do you have any screenshots of this? I haven't seen this question before... and i don't see a reference in the guide/application

https://studentaid.gov/sites/default/fi ... -fafsa.pdf
https://fsapartners.ed.gov/sites/defaul ... aGuide.pdf
I filled out and submitted FAFSA this week and I DID NOT encounter this question.
I put in cash and investment account info.
We are below that threshold anyway.
Post Reply