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Hr4520 and "grandfathered" provisions


Guest Jimmy

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Now that HR4520 will probably be signed, we are getting kinda worried. Can some "haircut" provisions be grandfathered? What do you think?

Do you think any of the key provisions (that have been changed) can be grandfathered in?

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According to the Conference Report (P. 516) the bill is effective for amounts deferred after June 3, 2004. The law does not apply to amounts deferred after 6/3/04 and before 1/1/05 pursuant to an irrevocable election or binding arrangement made before 6/3/04. Earnings on amounts deferred before the effective date are subject to the provision to the extent that such amounts are subject to the provision. I thought that Sect 885 would only apply to deferrals made after 12/31/04 and earnings attributable to such deferrals unless there was an election to further defer such amounts under a subsequent election.

mjb

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Jimmy,

What did you mean by "haircut provisions"?

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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Guest qualified plan

mbozek,

You wrote:

The law does not apply to amounts deferred after 6/3/04 and before 1/1/05 pursuant to an irrevocable election or binding arrangement made before 6/3/04.

Your reference to a 6/3 effective date is confusing to me. Everything I have read suggests that the Act is effective for taxable years after 12/31/04, but deferrals are subject to a retroactive application only if there is a material modification to the arrangement after Oct 3, 2004. Please clarify.

Thanks.

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mbozek's reference to the dates in the Conference Report is misleading but not completely false. Those dates are only in there as background where the Conference Report is describing what was in the original House and Senate bills that they needed to reconcile in conference. This effective date was not retained in the final bill that the conference sent back and was passed by Congress. Now it will only apply to deferrals after 12/31/04 with the possible problem associated with post-12/3/04 substantially changed plans.

However, you need to be careful about applying a haircut in the future to make sure that it will not be construed as a material modification of the grandfathered plan.

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Guest LeeNunn

Instead of using the term "grandfathered," think in terms of new rules and old rules. You can follow old rules to the extent that benefits are earned and vested by Dec 31, 2004. Neither Congress nor Treasury is endorsing the use of haircuts, financial distress triggers, rolling risk of forfeiture, offshore trusts, or any other security technique. If the technique is consistent with current tax law, you're fine. If not, the new law doesn't help you.

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This is consistent with my understanding -- you can continue to operate under "old plan rules" with respect to "old money;" the new rules do not apply. I've specifically heard that haircuts can potentially be continued (but not added). But the IRS is taking enforcement action -- and your risk is whether the old plan rules comply with "old law" -- whether your haircut provisions would violate 451 constructive receipt rules.

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While you can follow the old rules for "old money" being contributed, I see nothing that would grandfather the distribution of the "old money". I notice that many of the alerts being put out recommend that all provisions should be reviewed and a few such as the Dorsey & Whitney mention that "haircut " provisions are now prohibited.

Since "haircut" provisions are distribution related and I see no blanket grandfathering of distribution provisions, I would think that absent such explicit provisions, "haircut" provisions that are not compliant are now prohibited and are not grandfathered.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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As correctly noted by MGB, P 526 of the Conference report states that Sect. 885 applies to amounts deferred after 12/31/04 and to amounts deferred prior to 1/1/05 if there is a material modification to the plan after 10/3/04. Adding a benefit, right or feature (e.g. haircut) is a material modification. However, removing a haircut would not be a material modification. There is also an example of how pre 05 deferrals and post 05 earnings on such deferrals would be subject to the terms of the plan in effect on 10/3/04 if there are no subsequent material modifications. The Conference report is available on the Ways and Means website.

mjb

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So? What bearing does that have on the rest?

*********

I just went and re-read the Dorsey article. Where did you see anything that even implies "the suggestion that amendments need to occur"?

The article was :

http://www.dorsey.com/services/service_det...pubid=172644603

The phrasing that I see used was:

"employers should consult with tax and benefits counsel now so that necessary adjustments to current plans and arrangements can be implemented by year end."

"All companies with deferred compensation arrangements must immediately determine how the new legislation will affect their existing executive compensation programs."

I see no other relevant statements and I see nothing that implies or suggests that amendments must be made or even that significant actions must be taken.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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What about the title: "American Jobs Creation Act Will Require SIGNIFICANT ACTION On Deferred Compensation Plans By Year End" What does that mean?

Since we have no guidance yet, these articles can only speculate on what the final rules will be. However, it is my understanding that Treasury is going around telling people that they don't have to do anything different than what they otherwise would have -- i.e., no action -- before year end. And that the new law doesn't prohibit continued usage of haircut provisions in pre 10-2004 plans in regard to deferrals that are already earned and vested prior to January 1. The first guidance is expected within 6 or 8 weeks.

I'm assuming that commentators who haven't heard the first comment also haven't heard the second comment.

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Significant action means exactly that and nothing else. Why add words?

"Treasury is going around telling people" ?? It is amusing that you place so much credibility in what misc and most likely anonymous people claim that un-nameable Treasury people say.

There might have been no first comment so there might have been no second comment.

Notice what you say "the new law doesn't prohibit continued usage of haircut provisions in pre 10-2004 plans in regard to deferrals" Haircut provisions are distribution related not deferral related, so comments regarding deferrals would have no relevance to distributions, would they?

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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Because deferrals are different from distributions.

Because there is wording that would grandfather deferrals.

Because there is no wording that grandfathers "haircut" type distributions.

Because the issues are not yet clear and additional guidance is to be issued, so making statements that such distributions are definitely grandfathered, are premature and not based on reason or fact.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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  • 2 weeks later...

The Act applies to post 12/31/04 deferrals and prior deferrals that are not earned vested as of 1/1/05. Thus, if prior deferrals are subject to a substantial risk of forfeiture (as is the case in a 457(f) plan), they are subject to the Act.

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Something that is vested is something that usually is fixed agreed upon and cannot be changed. If $x is vested the $x is what is payable and paid.

Are "haircut provisions" earned or are theya promise to pay maybe?

Under haircut provisions $x(+-%???) is what is/might be/just maybe due. Can such a variable conditional item be regarded as being vested? Or is it only a promise to pay some amount some day? I do not see that this would be a vested item.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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So what do they mean on page 5 of the same document under their own section titled """Haircuts" Penalty Withdrawals ....." where they state that "Code section 409A precludes "haircut" and other penalty withdrawal rights."

Precludes means to make impossible. So what do they mean?

But notice the wording in their "Grandfather" section. It is applying "haircut" mainly in a context of deferrals while the other sections deal with withdrawals and distributions.

Additionally, just below the link to the Davis and Harman comparison is another link to an "an employer action plan" from Groom Law Group a much bigger outfit with great contacts and which also works closely with groups that influenced the legislation and will influence the regulations etc etc. Look at what Groom says about haircuts on page 1 Item 3:

http://snipurl.com/6krn

Re "ROFLOL. My information is very reliable."

Reliable for what? Confusion? What?

There is an old saying .. He who laughs last laughs best.

Why not just wait for IRS clarification?

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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GB: The Groom article prefaces its discussion of the changes by noting that 409A applies to deferrals of compensation after 12/31/04. Instead of referring to law firm newlsletters why not read the Conference Committee Report on the Ways and Means website which describes the application of the grandfather rule to pre 05 deferralson P. 526?

mjb

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mbozek,

I will go and read it, but your post raises a question.

Why tell me, GB specifically, to go read it, when there have been other posters who have also quoted or relied on these newsletters etc? Are you suggesting that they should not or have no need to read also and that I am the only person who needs to go read it?

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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