In a recent private-letter ruling, the IRS loosened rules for businesses trying to maximize 401(k) opportunities for their most highly compensated employees.

"The new ruling concerns something known as a nonqualified wraparound plan," explains Fred Rumack, national director of tax and legal services at Buck Consultants, which has headquarters in New York City. "With these plans, companies are able to allow their highest-paid employees to defer the top rate permitted in their qualified 401(k) plan -- that is, 15% of their salaries throughout the year. The companies can also match those deferrals at the same matching rate that applies to all employees and invest the funds as if they were in the 401(k) but not actually deposit them in the 401(k) until year's end."

Here's what that accomplishes: "If it turns out that, because of lower participation rates from lower-paid employees, top staffers aren't legally able to contribute the full 15% into the 401(k) plan, excess funds will simply be returned to them at year's end." Before the ruling, many executives deferred at low rates so that they (and their companies) wouldn't risk penalties by causing the plan's participation levels to seem "top-heavy."

Wraparounds can also help companies, notes Rumack, by "simplifying the need for compliance testing throughout the year." Check with a benefits expert to see if a wraparound is right for your company.

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