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kmhaab

Can rights under a NQDC plan be assignable to a Trust?

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Employer has an NQDC plan in the form of "appreciation units."  Executive wants any payments under the plan to be paid to a trust, of which he and his wife are the trustees, instead of to him directly.  My understanding is this does not avoid taxation for him, but he wants the trust to hold all of his assets.  Plan currently does not permit the assignment of rights under the plan.

My question is this: 

Does amending the plan to allow a participant to assign his/her right to payment to a trust present problems under 409A?  Any right to payment is still subject to forfeiture.

Any thoughts on this would be much appreciated.

 

 

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I don't see how it would violate 409A, but you're correct that it would have absolutely no impact on tax result or the employer's tax-reporting obligations.  If Exec. thinks this accomplishes some asset protection or estate planning objective that couldn't be accomplished by taking the money first and then contributing it to the trust, I would be very skeptical of that.   

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You may have a constructive receipt issue if the participant has the right to assign the benefit away today.  Section 409A does not supersede Section 451.

Revenue Procedure 92-65 listed a number of requirements that a nonqualified plan had to meet in order to receive an advance ruling from the IRS that the plan did not create constructive receipt under section 451, not that anyone asked for advance rulings and the IRS later said they wouldn't give advance rulings.

The plan must provide that a participant's rights to benefit pay­ments under the plan are not subject in any manner to anticipation, alien­ation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors of the par­ticipant or the participant's beneficia­ry.

As such, it was standard practice to include this language so that an argument for constructive receipt would be harder to make.

Even the substitution rules under 409A note the following:

In addition, where a service provider’s right to deferred compensation is made subject to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors of the service provider or the service provider’s beneficiary, the deferred compensation is treated as having been paid.

If this just for the convenience of a participant, not sure it's worth the risk.

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I think that concept only applies if the right to deferred compensation can be assigned for value, which would not be the case here.  Believe me if I were advising the Employer I would advise against it for various reasons, but I don't see a 409A or constructive receipt problem.  

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In theory, constructive receipt raises its ugly head because by naming what is effectively an alternate payee you would have a measure of control which makes the notional account more "real".  Same argument as not applying DROs to NQ balances before 409A said it was allowable. 

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This seems complicated. Because the assignment should have no effect whatsoever on the taxation of the amounts to him (see Oliver Wendell Holmes' opinion for majority in 1930 Lucas v. Earl Supreme Court case establishing "fruit of tree doctrine"), it should not cause constructive receipt. Just be ignored for tax purposes, then after taxed to him might or might not have tax consequences post-inclusion when contributed to trust. This would seem clearly to be the case if the trust is a grantor trust. But it may be debatable. Would need to review trust and plan documents, etc. If, for example, a creditor were a trust beneficiary and the executive received a current benefit from the anticipatory transfer, there might be an issue of inclusion based on economic benefit. As you point out for this plan, plans usually prohibit any consensual or nonconsensual transfers or assignments to avoid these issues, so I doubt there is much guidance or case law on the issue.

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A transfer to even a grantor trust is a change in ownership, with the possible exception of a transfer to a trust of which the grantor is the sole trustee.  Even then, how is the employer to know if the participant ceases to be the sole trustee? Although the beneficial interest does not change, title does change.  I have no doubt that having the right to change ownership of the NQDC benefits will trigger 451 constructive receipt.   Assignment would also violate 409A, because it would constitute a change of ownership by the plan participant before the date permitted by the plan and section 409A.

There is no need for the participant to transfer ownership of the benefits.  The NQDC program undoubtedly has beneficiary provisions.  The participant can designate the trustees of his trust as beneficiary, thus ensuring consolidation of the NQDC benefits with his other assets and avoiding probate at his death.  Treat the NQDC plan as you would treat an IRA, which would never be transferred to a trust.

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