If the plan provides that the employer will make a contribution of a set amount, in this case $30,000, to an employee's deferred compensation account each year, is there any prohibition under Section 409A to the employer increasing the amount at its discretion.

The plan document provides that employer will make a contribution of $30,000 to the employee's deferred compensation account by the end of the fiscal year. Could the employer change the amount to say $80,000? If so, does it need to amend the document before the last day of the prior fiscal year?

Under the terms of the plan, the employee has no discretion to make salary deferrals, rather, all funding comes from the employer contribution.

Why would an employer violate its own deferred compensation plan without amending it first? Whimsy?
Since no deduction is permitted, and since the employee has no vested rights to the additional contribution, your question is not a question of tax law. However, I would ask who could be hurt by the action? Shareholders may have a cause of action against the employer. Creditors would definitely have a claim against the excess contribution amount is push comes to shove.
The truth is that the only reason an employer would engage in such behavior is because it simply has no respect for laws and written agreements. That employer is not a good candidate for a deferred compensation plan in the first place.

Thanks - I think you are right

The wording used in the OP makes me wonder if I really understand the question.

Are there conditions for the employer's "discretion"? Is the contribution based on a formula that the employer uses to determine the "discretionary" amount ?

Is the "set amount" really stated as such in the documents or is it $30,000 becuase that is what it was calculated to be in prior years and has become "normal" ?

Why would the employer want to increase the amount ?

By way of background, there are sister companies with identical ownership. Company A is the operating company and Company B is the management company, which is where the deferred compensation plan is housed. In good years for Company A, Company B received a larger management fee and increased the amount of the the employer contribution to the deferred comp accounts of the employees who are also the two shareholders. The deferred compensation agreements of Company B expressly state that the employer's contribution will be $30,000 per year with no discretion or formula to increase the amount. The employer/shareholder/employee wanted to sock away as much as possible in the deferred comp account.

They want to "sock away as much as possible" but not enough to type up a simple amendment to permit it?

vebaguru:
So, are we to ask you offline the specific sections, and you will provide the answer for a fee?
Don Levit

Don

Specific sections of what ?

Unless I am missing something here, or just reading them wrong, it sounds like some of the responses are pretty out of synch with the question.

Buzzman, please correct if I am wrong, but inserting my own years for purposes of the example, you are stating that management company receives income from operating company and management company has a NQDCP through which it defers 30K annually and has the appropriate documents in place.

In good years, operating company more or less pays management company a bonus. "2007" was one such good year. It is now 2008 and management company wants to defer some of that extra cash (that was based on 2007's results) into its NQDCP. You want to know if they needed to make that election by 12/31/07 to defer it this year, or if they can make a current ammendment. Is this a correct assesment of your question? Aren't you really asking if management company has already missed the boat in terms of its deadline to make an ammendment to accomodate this?

Thanks.

Yes Eric - you hit the nail on the head and the issue relates to prior years where more was deposited than the plan provided for. It appears that the boat has sailed, as no amendments were made to increase contributions prior to January 1 of the year of deferral.

If this is an employer-initiated change, and not an employee election, why can't the EMPLOYER amend the plan to change (i.e., increase or decrease) the amount to be contributed for the year even after the beginning of the year (if the plan allows)?

As long as the plan is amended by the end of the year the increased contribution is made, you should be able to do it, provided there are no games being played. The applicable regs:

§1.409A-1(c)(3)(vi) Plan amendments. In the case of an amendment that increases the amount deferred under a nonqualified deferred compensation plan, the plan is not considered established with respect to the additional amount deferred until the plan, as amended, is established in accordance with paragraph (c)(3)(i) of this section.

§1.409A-1(c)(3) Establishment of plan--(i) In general. A plan does not satisfy the requirements of section 409A and this section and §§1.409A-2 through 1.409A-3 and §§1.409A-5 through 1.409A-6, unless the plan is established and maintained by a service recipient in accordance with the requirements of this section, §§1.409A-2 through 1.409A-3 and §§1.409A-5 through 1.409A-6. For purposes of this paragraph (c)(3), a plan is established on the latest of the date on which it is adopted, the date on which it is effective, and the date on which the material terms of the plan are set forth in writing. The material terms of the plan may be set forth in writing in one or more documents. For purposes of this paragraph (c)(3)(i), a plan will be deemed to be set forth in writing if it is set forth in any other form that is approved by the Commissioner. The material terms of the plan include the amount (or the method or formula for determining the amount) of deferred compensation to be provided under the plan and the time and form of payment. Notwithstanding the foregoing, a plan will be deemed to be established as of the date the participant obtains a legally binding right to a deferral of compensation, provided that the plan is otherwise established under the rules of this paragraph (c)(3)(i) by the end of the taxable year of the service provider in which the legally binding right arises, or with respect to an amount not payable in the year immediately following the taxable year of the service provider in which the legally binding right arises (the subsequent year), the 15th day of the third month of the subsequent year.

No deduction is permitted, and since the employee has no vested rights to the additional contribution, your question is not a question of tax law.

Why can't the EMPLOYER amend the plan to change???This is individual's decision.

Thanks.