Non Qualified Excess Savings Plan vs Mega Backdoor - need advice

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jake65892
Posts: 13
Joined: Tue Apr 08, 2014 6:53 pm

Non Qualified Excess Savings Plan vs Mega Backdoor - need advice

Post by jake65892 »

For 2023 I have hit a threshold where I have the option to enroll in a non-qualified excess retirement savings plan, and the first time I have encountered one of these as an option.
I'm trying to decide if I should enroll or continue to save via a mega-backdoor Roth. I'm already maxing out Roth IRAs and HSAs, not maxing out my mega-backdoor Roth.

Our current 401k plan allows for Pre-Tax contributions, Roth contributions, and Post-Tax contributions. The company provides a match on all 3 the same way, even post-tax contributions. In addition, they allow for post-tax contributions to be converted into the Roth 401k at the end of the year. Last year I signed up to do this automatically so I don't have to call. I should note that I'm not maxing out my Mega Backdoor Roth.

Now I have this new option for a non-qualified excess retirement savings plan. It is a spill-over plan such that I can allocate %'s between pre-tax and Roth, but once I hit the IRS 401k limit, all contribution %'s turn into pre-tax and go into this non-qualified plan. This non-qualified plan has the same investment options as the 401k retirement savings plan. In addition, they do the same match as the 401k plan. Distribution can be lump sum, or a variety of installment periods up to 15 years max once over 55. Once I make selections for %'s and investments, I can't change them.

The way I've summarized the differences in my mind are...
  • The non-qualified excess retirement savings plan is able to save more than a Mega backdoor roth (But I'm not at that savings level yet).
  • The non-qualified excess retirement savings plan is pre-tax, where a Mega backdoor roth is currently post-tax.
  • Both provide the same company match.
  • The non-qualified excess retirement savings plan has pretty strict distribution requirements (i.e. can't change in the future), but could provide income between 55 and retirement age. I'm currently 37.
  • There seems to be an additional risk on the non-qualified plan due to bankruptcy of the company, although it is a fortune 500 company.
Overall, I'm leaning towards the Mega backdoor since I'm not maxing it out and I like the tax diversity, but seems like there may be something I'm not thinking of.

Is there anything I'm missing?
lakpr
Posts: 8763
Joined: Fri Mar 18, 2011 9:59 am

Re: Non Qualified Excess Savings Plan vs Mega Backdoor - need advice

Post by lakpr »

jake65892 wrote: Wed Nov 23, 2022 12:59 pmThere seems to be an additional risk on the non-qualified plan due to bankruptcy of the company, although it is a fortune 500 company.

Overall, I'm leaning towards the Mega backdoor since I'm not maxing it out and I like the tax diversity, but seems like there may be something I'm not thinking of.

Is there anything I'm missing?
I snipped most of your post but kept just the salient points. Yes, the non-qualified plan is at risk of creditors if your company goes bankrupt. Even Enron was a Fortune-500 company once; and it was a spectacular lights-out within two days!. Since either way you are going to bump into the same exact IRS limit, if you have excess cash it should go towards the MBDR (after-tax --> Roth within the plan). This way the money retains ERISA protections, and is not considered property of the company.
DVMResident
Posts: 1746
Joined: Mon Aug 01, 2011 8:15 pm

Re: Non Qualified Excess Savings Plan vs Mega Backdoor - need advice

Post by DVMResident »

At 37, megaback door Roth first then DCP.

IMO the largest likely “problem” with is the distribution upon separation without an option rollover or when there is an event such as a merger/acquisition if the plan has a change control clause (I’m not a lawyer, but I did pay for a tax attorney review and this was a major consideration in his review). When distributions start, you will either take a huge tax hit, find an employer also offering a DCP that will (indirectly) offset distributions, or low-income (e.g. unemployment). At 37, the chance you’ll be forced into a distribution over the course of your career is high. If you plan FIRE <10 years and feel stable, maybe you consider a DCP over the MBR.

—————

I use mine as self-funded unemployment insurance and bridge DCPs from employers-to-employers. But I’m also a high enough level that almost all large employers provide DCPs as an option. Just all my future employers will have to be SP500 companies (probably).

If you promote to a director or higher (or at least that’s my fields informal access level), you can bridge DCP via the method I described above. YMMV.
Topic Author
jake65892
Posts: 13
Joined: Tue Apr 08, 2014 6:53 pm

Re: Non Qualified Excess Savings Plan vs Mega Backdoor - need advice

Post by jake65892 »

Thanks, this is very helpful. Hadn't thought about bridging DCP (new acronym for me!) if I change employers, but that certainly makes sense and seems less risky.
This plan does say that distributions occur when you leave the company or turn 55, whichever is later. Looks like I couldn't use this to bridge or as self-funded employment insurance similar to how you are leveraging your plan, unless I'm over 55. Or are these negotiable at all?

I'm wondering if there aren't different DCPs, with different features, available at different career levels. Reading the IRS site on 457's, it seems that all of DCPs type accounts would limit MBDR contributions, right?

Thanks again for helping explain some of this to me, it's all new.
DVMResident
Posts: 1746
Joined: Mon Aug 01, 2011 8:15 pm

Re: Non Qualified Excess Savings Plan vs Mega Backdoor - need advice

Post by DVMResident »

The variance between DCPs is much higher than 401(k) and you find all sorts of quirks. The age portion of the “leave the company or turn 55, whichever is later” clause is something I’ve ever seen or even hear of. All plans I’ve seen are simply starts distributions the year after separation either as a lump or annual installments up to 10 years. The age thing is very odd given DCP are part of a retention tool (golden handcuffs) and this clause gives leadership an “out.” Usually, these terms are not negotiable…unless you’re really high in the organization…

Someone on this board recommended having a tax attorney review these documents before putting large sums in these plans because they’re so variable. I did and consider the advice worth the money. If you’re in CA, I can recommend somebody.

In any event, the age-based distribution doesn’t change my comments. If those distributions start at 55 and you’re still working, you be facing a serious tax bill. On the other hand, if you’ve retired (e.g. FIRE, layoff) or can offset the income, this is a non-issue.

As to doing both a DCP and MBDR, I’m not aware of any IRS limit. I’ve done both non-qualified DCPs and MBDR as recently as 2019.
Last edited by DVMResident on Thu Nov 24, 2022 12:42 pm, edited 1 time in total.
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retiredjg
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Re: Non Qualified Excess Savings Plan vs Mega Backdoor - need advice

Post by retiredjg »

Sounds like a non-governmental 457 to me, with all the benefits and downfalls therein.

Many people here have used them. Only a few have reported running into a problem. if you are willing to accept the possible loss of your money and possible inconvenient payout requirements in order to get the tax-deferral (which you likely need), then it is a reasonable choice.

I probably would not use it myself. I'd prefer to put money into Roth (via mega-backdoor) or taxable and just pay the taxes up front, high as they may be. There is a very high probability you will have plenty (maybe more than plenty) in your tax-deferred accounts without this anyway. But that is just my personal preference.

If you are likely to have a pension, I would avoid the 457 - because you probably will end up with too much in tax-deferred accounts and then will be scrambling to get the money out before RMDs.

Participating in a non-gov 457 should not affect your mega-backdoor at all. They are separate limits.
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