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Do I need a document??


austin3515

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Employment agreement plainly says "Executive gets $50,000 a year for 5 years credited to a book account with no money actually set aside.  The Executive only gets the money if he is actively employed all the way trhough the 5 year anniversary date and is paid immediately thereafter."

We all agree I think that neither 409A nor 457f applies because there is no deferral of income beyond when the substantial risk of forfeiture lapses. 

Do I need a document beyond the employment agreement?

I guess I need a top-hat filing to avoid a 5500 filing requirement.  Is there anything else like that?

Austin Powers, CPA, QPA, ERPA

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Are you sure this is even an ERISA plan?  Looks like it's more structured as a bonus arrangement, not a pension plan, so a top hat filing may not even be necessary.  If you think you need to do the top hat filing, then the ERISA claims procedures need to be documented somewhere.

Since the rules of 409A apply "separately and in addition to" 457(f), any conclusion that the arrangement is not a deferral of compensation under 409A (short term deferral rule) doesn't mean that 457(f) doesn't apply.

 - There are two types of people in the world: those who can extrapolate from incomplete data sets...

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Why people do this is beyond me.  It would have been so much simpler if they had said that on his 5th anniversary, subject to whatever conditions they choose, he gets a BONUS of $250,000.  By making it "$50,000 per year" makes it seem more like a "plan" and it is actually meaningless because it's "all or nothing" after 5 years - the only number that is relevant is $250k.   I would argue it isn't a plan - it is an "employment agreement" inartfully drafted.

Tell them not to do it again.

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There are only two reasons I see for the notional crediting of $50,000 per year to the book account instead of MoJo's suggestion.  One is to match the accounting the organization is likely doing for the award (a nice straight line amortization), and the other is if there is some intent to credit some sort of notional earnings annually (which doesn't seem to be the case here).

 - There are two types of people in the world: those who can extrapolate from incomplete data sets...

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1 hour ago, XTitan said:

There are only two reasons I see for the notional crediting of $50,000 per year to the book account instead of MoJo's suggestion.  One is to match the accounting the organization is likely doing for the award (a nice straight line amortization)....

That's an "internal bookkeeping" issue and not one of relevance to the arrangement between the employee and employer - and in any event, not one that wold need to memorialized in any document.

The "crediting of interest" issue you raise, would be something to be memorialized - but then you are getting into "a plan of deferred compensation" which resolves itself closer to a "plan document" is required.  Still, the simple way to do so would be to say a "bonus of $260k" or $270k" or whatever, if the interest credited is constant and calculable.

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FWIW, in my opinion, this arrangement would not be considered a "pension plan" under the accounting standards.

I'm a retirement actuary. Nothing about my comments is intended or should be construed as investment, tax, legal or accounting advice. Occasionally, but not all the time, it might be reasonable to interpret my comments as actuarial or consulting advice.

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