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Establish new plan in november 2006


Guest IRISH79

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Guest IRISH79

The general rule is that deferral elections must be in place by the end of the calendar year preceding the year to which the compensation is earned. Can an employer establish a new plan in November 2006 and take advantage of the exception for deferral elections being made within 30 days of becoming eligible so that deferrals are made in 2006?

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Only if there is no other similar plan sponsored by the employer in which the participant also participates...they are combined to determine if he is a "new entrant." And also, only for compensation earned after the election is signed...which normally wouldn't be much.

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Guest IRISH79

Just Me:

Thanks for your response. Pre-409A IRS had taken position (in private letter rulings) that implementation after the tax year had begun would be permissible. I had not seen anything which addressed this issue in any of the 409A regulatory guidance issed thus far.

Another question: Any bonus for 2006 would have to be prorated from date election made if paid in 2006. But, if the bonus for perormance in 2006 is to be paid in 2007 this election must be made by 12/31/2006, correct?

Regards

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  • 1 month later...

Maybe I'm wrong on this but I think even if a 2006 bonus is to be paid in 2007, you need to make the election before the services giving rise to the bonus are rendered under the 409A rules hence the need to prorate for the bonus amount presumably attributable to the services rendered after the election.

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  • 2 months later...

409A has a special rule for bonuses that are performance-based. If the incentive compensation is paid under a performance-based plan that covers at least a 12-month measurement period, the deferral election can be made up to 6 months before the end of the measurement period. This would mean, for example, that an employee could elect to defer his or her 2006 annual bonus (payable in 2007) up until June 30, 2006. However, in order to qualify, the bonus plan must be based on objective performance factors put into place no later than the first quarter of the measurement period. Regulations are anticipated to borrow from, but not be as strict as, the Code Section 162(m) performance measurement provisions. A guaranteed bonus is not eligible for the six-month rule, and is treated in the same manner as base compensation

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