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Gilmore, I guess payroll systems might differ, but the spread at exercise of a nonqualified option (NSO) is current FICA and FITW income for employees, so they must have a system for putting the amount into pay stub and withholding (from other amounts, or through broker if the shares are immediately sold in cashless exercise). If they are using the W-2 or 3401(a) safe harbor definition in their 401(k) plan, which they probably are, then it would be comp for deferral purposes and they would apply the individual's deferral election to, and withhold for deposit into the plan, just as they are withholding for their payroll tax deposit and 941, from whatever they are paying the person from which it is convenient to withhold. Occasionally plans will allow special elections for bonuses, but that's rare.

Yes, my position is that only once all of the allocation conditions are fulfilled is the allocable share a protected benefit. Agree, but watch out that there often are exceptions to the "last day of the plan year" condition for those who retire, die, become disabled, go on military leave, etc. during the plan year. It complicates things if the allocable share is a 411(d)(6) protected benefit for some participants.

There is quite a bit in your question above. But, let's start with the income taxation of NSOs. I assume that the exercise price of the NSO is not less than the FMV (as defined in the 1.409(A) Treasury Regulations) of the underlying stock on the date the NSO is granted (i.e., it is not a discounted option) so that we are not dealing with potential 409(A) issues. If the option itself (not the underlying stock) is not readily tradable on the market (which is almost always the case with compensatory options), the individual granted the option is taxed at the time the NSO is exercised, not date of grant. Options typically have a vesting schedule, and the individual has to wait for the option to vest before he/she can exercise the option. The amount subject to tax is the difference between the value of the underlying stock on the date of exercise minus the exercise price. This is ordinary income for the tax year in which the NSO is exercised and is reported as such in box 12 of the W-2. In some cases (if the option plan document or agreement allow) the individual may chose to "early exercise" an NSO--that is exercise the NSO even though it has not vested--by timely filing an 83(b) election. Without getting into the details of the 83(b) election, suffice it to say that if the election is properly made, the difference between the value of the underlying stock at the time of the 83(b) election is made (i.e., at the time of "early exercise") minus the exercise price is ordinary income in the tax year the 83(b) election is made. For 415 compensation definition purposes, it is important to differentiate between the "early" exercise of an NSO and the regular or "non-early exercise" (i.e., exercise after vesting--the first scenario I described above). 1. The W-2 and the 3401(a) require you to include in compensation the amount of ordinary income at time of exercise of the NSO (early or non-early). 2. The 415 simplified compensation safer harbor definition excludes the ordinary income from the exercise of NSO (early and non-early). 3. The current includable compensation safe harbor definition excludes the ordinary income from the non-early exercise of an NSO, but it does include income from the early exercise (from the 83(b) election).

Gilmore, portions of the reg have never made sense to me. Thankfully, most people today use the W-2 or 3401(a) safe harbor, and so, as FORMER ESQ. says above, the W-2 comp that occurs when the option is exercised will be included, because it will be on the individual's W-2 for both reporting and withholding purposes, when exercised. At least the answer will be clear if the optionee exercises while he or she is still employed by the grantor corporation. But even with the W-2 or 3401(a) safe harbors, I am not quite sure how the regs are intended to apply if the exercise of the option occurs after an individual terminates employment. The spread will definitely be on a W-2 for the year of exercise, but what about the timing rules for post-employment compensation in 1.415(c)-2(e)? Is the post-severance spread considered "regular pay after severance from employment" under (e)(3)(ii), like a bonus, since the option could have been exercised before severance in almost all circumstances. That's probably the intended answer. But some might see it as a post-severance payment under (e)(3)(iv. Once you move away from the W-2 and 3401(a) safe harbors, things get more mysterious. Nonqualified option spread is mostly, or perhaps entirely, excluded from 415 comp. First mystery: Why is the general 415(c) definition completely different from the W-2 and 3401(a) safe harbors on this point? Second mystery, why does 1.415(c)(2)(b)(5) tell you to include the value of an option in W-2 comp if it is included in income in the year of grant? Do they mean if the option was vested and the individual exercises in the year of grant? Maybe, but the text here seems pretty clear they are looking at the option itself as being the taxable item in the year of grant, not the spread at exercise, and again as FORMER ESQ states, the option is almost never the taxable item, because even if the stock is publicly traded the compensatory option will have terms different from any traded option on the stock. In fact, I have NEVER seen a compensatory option be includible in income. Moreover, 1.415(c)(2)(c)(2) seems to say you always exclude the spread on exercise of an option, regardless of timing. So my conclusion is that under the general 415 comp definition, nonqualified option spread is never 415(c) comp. And why is income from an 83(b) election included (1.415(c)-2(b)(6)), but not income under Section 83 due to vesting (1.415(c)-2(c)(2))? Probably because they are thinking of restricted stock, not options, and the 83(b) election has to be made within 30 days, so they figure it's really current wage income, just paid in property. The general definition of 415 comp that has these mysteries pre-dates the W-2 and 3401(a) safe harbors by many decades. My guess is that when it was first put into the regs, accounting systems were feeble and there was no internet, so who even knew (in 1964) that if a former employee exercised an option it was reportable on a W-2, or even reportable? And how would you track it? So some of these administrability issues made there way into the regs. Oh for the good old days!

OK. I'm glad we had this discussion. I misread the OP (oops). Agree with you that since plan had no ldy provision, it would be aggressive to change the allocation method now. But I would still say the TAM does not completely settle the matter (even assuming that you want to follow the TAM, because don't want to have a battle with IRS), because in the TAM the amendment was both after the end of the plan year and after the money had already been contributed.

Oh, 14.4k! Gawd, faster than a 9600, and already at 9600 one can hardly keep up with the type as it scrolls across the screen. Mine was a Practical Peripherals -- I can't bear to get rid of it. I'll take a photo! I remember my 2400 baud modem, which had a little green light on the front that lit up behind the silhouette of a rabbit, when the modem was able to negotiate a 9600 baud connection with the other modem! High-speed, man, look out.

[Dr. Evil]One. Million. Dollars.[/Dr. Evil]

I don't think I've ever seen anyone charge the copy costs. It'll cost your bookkeeper more time in putting the few dollars into the ledger than the "revenue". I agree: send .pdf or send them to: https://www.efast.dol.gov/portal/app/disseminatePublic?execution=e1s1

Can the participant go online and see it on the DOL website? Can you just send a pdf? I guess the SAR says they have the right to examine at the office so...if you don't want to do that, waive the $2 fee and send it.

Any/all of our MP plans were either merged or restated into something else long, long ago. You have to maintain the accounts separately and keep the J&S annuity provisions on those accounts if the rest of the plan doesn't have them. Our (FTW) prototypes have a checkbox to indicate if such money exists and it triggers the necessary language in the SPD and elsewhere.

We'll agree to disagree. I think the IRS has, over the years, made its position very clear - unofficially. Like Bird, I've been conditioned over the years from IRS comments, etc. - yes, I absolutely concede not official guidance - that once you have earned the right to an allocation under the current formula, that's it. Not saying it can't be challenged - just saying I wouldn't do it, and wouldn't recommend that a client do it, unless so advised by their legal counsel.

What is the highest DB+DC allocation rate for any HCE? If it is 35% or higher then your gateway minimum is 7.5%. Each NHCE then has to have DB+DC allocation rate of at least 7.5%, or alternatively, a DC allocation rate of 4.00% since the average 3.5% allocation coming from the DB plan gets them up to the 7.5% gateway. If the highest DB+DC allocation rate for any HCE is less than 35%, these numbers will be less. If the plan top heavy? If so you may be stuck giving the NHCEs (plus non-key HCEs, if any) 5% profit sharing regardless.

Bringing in the ideas from this other thread, is there anything stopping them from adopting a new plan and excluding vesting service prior to that plan's effective date?

@alexa A number issues to be aware of: Your Section 125 cafeteria plan almost certainly provides that participants remain eligible for the health FSA only while employed. Upon termination, they likely have standard run-out period (typically 90 days), with the option to continue coverage through COBRA if the account is underspent. Failure to follow the terms of the written cafeteria plan document jeopardizes the Section 125 safe harbor from constructive receipt, potentially resulting in all cafeteria plan elections becoming taxable for all employees. COBRA is available only through the end of the plan year in which the qualifying event occurs (with the exception of carryover funds that may continue to be available for the standard maximum coverage period). Employees will have no way to contribute pre-tax to the health FSA after termination of employment unless they continue to receive a standard payroll stream of payment as severance. I suppose in theory you could create a sort of retiree eligibility for the health FSA for as long as the cafeteria plan provided, the TPA could accommodate, and the terminated employee continued to receive regular severance payments, but I've never seen that attempted. What I would recommend is dropping that approach and simply moving to COBRA subsidies--while being careful to avoid potential §105(h) nondiscrimination issues. That's typically the only way you can accomplish employer-paid continuation of any H&W benefit without creating a retiree plan (which likely isn't your goal or blessed by the carriers/stop-loss). A couple posts that may be helpful: https://www.theabdteam.com/blog/health-fsa-reimbursements-termination-employment-2/ https://www.theabdteam.com/blog/cobra-subsidies-reimbursement-2/

I still remember the joy of upgrading from my 4800 baud modem to a 14.4kb modem and it was screaming. It would upload the answer packet and download the new message packet and I was golden for another evening of trying to keep the hell up.

Cool. I used the same file in my presentation to ACOPA in 2017. The audience got a kick out of it.