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Ken Davis

20% additional tax

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Am I correct that the 20% additional tax does not apply to amounts included in income as long as the deferred comp plan meets the 409A requirements of distribution, acceleration of benefits and elections and operates in accordance with them?

Thanks,

Ken Davis

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If a plan is making a routine distribution or constructive receipt occurs with no 409A failure, the employer does not have to report the amount in Box 12 Code Z, and the 20% penalty does not apply.

If the amount is included in income because of a 409A failure, then the amount has to be reported in Box 12 Code Z, and the penalty applies.

BTW--can anyone think of a situation where the doctrine of constructive receipt would make an amount deferred taxable without there being a 409A failure. I just have a conceptual road block as to the practical significance of the contructive receipt rules post 409A?

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Guest mjb

how about benefits are payable on account of employee reaching retirement age but benefits are not paid?

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how about benefits are payable on account of employee reaching retirement age but benefits are not paid?

Yeah, I guess it would be "plan failure" with no 409A consequences. Seems logical that penalties would not apply since the IRS gets its tax money whether the plan pays or not. thanks

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Actually I just got finished with a 409A conference where the attorneys suggested that where the employer doesn't pay and, e.g. the employee disputes, you can run afoul of pay too late rule. In other words the amount must be paid at retirement and not later. So I guess the example you gave (MJB) doesn't work because CR doesn't "save" you from 409A failure.

Any thoughts?

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Guest mjb

I was referring to the situation where the benefits become available on a specified date, e.g., 65 but the employer forgets to send the check or the employee fails to request a distribution. Under the rules for CR in IRC 451 the benefits will be deemed included in income at that time. See 409A©-"Nothing in this section shall be construed to prevent the inclusion of amounts in gross income under any other provision of this chapter [income tax] or any other rule of law earlier than the time provided in this section. " Under reg. 1.409A-3(d) payment due on a specified date may be made as of any later date in the taxable year. If the payment is deemed included in income on the retirement date under CR what provision of 409A is violated if the payment is made after the last day permitted under 409A since the amount has already been included in income?

Under 1.409A-3 an employee may receive a payment which is disputed by the employer at a date later than the date specified in the plan without violating 409A.

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Guest aciepluch

How about a situation where a participant modifies a distribution election under a DB SERP within 12 months of the distribution date but it is not a 409A violation because the participant is changing from one annuity form to another equivalent form?

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How about a situation where a participant modifies a distribution election under a DB SERP within 12 months of the distribution date but it is not a 409A violation because the participant is changing from one annuity form to another equivalent form?

I don't think CR would occur in that case.

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Guest Harry O

If benefits are not paid at 65, this would seem to be an impermissible further deferral subject to the 20% tax.

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Guest mjb

If the employee is taxed at 65 under the IRC 451 CR provisions which is required under 409A©, where is there a deferral subject to the 20% tax?

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If benefits are not paid at 65, this would seem to be an impermissible further deferral subject to the 20% tax.

mjb's theory is saying there is no further deferral since CR will cause the tax to be due when the amount should have been distributed at age 65. But the bigger fear is that there may be an overriding 409A failure that will affect amounts previously deferred regardless of CR. I think this is the reason so many are fearful of making any kind of mistake without a correction procedure to provide relief.

CR arguably causes the amount to be taxed when it should have been distributed but this doesn't necessarily prevent a technical 409A failure since the amount should have been paid, but was not. 409A(a)(1) is titled "plan failures" and refers to gross income inclusion when the timing of payment, etc. rules aren't met. The distribution rules refer only to when an amount is distributed not to when it is distributed or made available. So if the plan doesn't actually pay upon a permissible event, it is a failure and inclusion in gross income occurs.

So rather than tax it when the amount was arguably made available--age 65--the IRS could seemingly blow up all your deferrals and apply the 20% tax plus interest from whenever the amounts were initially deferred. This should be more than a little terrifying to administrators.

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