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These are a pain but otherwise ok. Don't look at the 10 years as an eligibility, think of it as a points-based allocation. The ACP testing still only looks at the match on an aggregate basis, it doesn't care about the underlying formula(s), it just compares the HCE amounts to the NHCE amounts. Each formula will need to be tested under 401(a)(4) to ensure the group benefitting isn't discriminatory.

It looks like you are using the end of the year valuation date. If the valuation date was not changed in any of the four preceding years, you can change it to the first day of the Plan Year, i.e. 1/1/2022. If it's not enough to get your minimum contribution to $0, see Nate S' comment above.

can you change the asset valuation methodology to allow for smoothing of the gain/loss?

Sure on termination the majority owners could waiver benefits, forego benefits, take a hair cut, whatever you want to call it. However IRS stated position, the Internal Revenue Code, and Treasury Regs concerning minimum funding rules are all consistent in the rules required in that owners are not allowed to forego benefits to reduce minimum funding requirements. Even if you have had the IRS agree to that in specific cases, it's not something you can rely upon under the law.

Someone out there must be saying this. This is the 2nd time I have heard someone say, "I just heard I can freeze the value of the ESOP account to the value of the year they terminated" in about a week. And I doubt my client is coming here to get a 2nd opinion after I talked about segregation. I don't know who is doing this but I am prepared to slap them upside of the head. The replies capture the correct answer.

Segregation is common only when the stock is replaced with cash. The cash will need to be prudently invested. If you question is whether a company can keep a terminated employee invested in shares and freeze their value to a set price, there is no legal way to accomplishing that result. Stock held in an ESOP is required to be valued at least annually.

Agreed. Take a look at IRC 414(q) - I think this gives adequate citations and cross references. See particularly 414(q)(7).

I think Lou is correct. The regs define the employer as the sponsor and any other entity required to be aggregated under the CG and ASG rules, so if you are a 5%+ owner of any entity in the group you are a 5% owner and an HCE. Otherwise, you could have 21 equal partners owning less than 5% of the partnership, but 100% of their own participating S-corp PCs, then pay themselves W2 under the HCE comp limit so no one would be an HCE. Then they could adopt a rich plan or plans for themselves and exclude anyone else because there would be no HCEs. But if Lou and I are not correct, I call dibs on the design in my second paragraph!

My understand for HCE/KEY ownership is you look at the largest percentage owned of any entity in the CG/ASG so Jane smith would be 100% due to her 100% ownership of Jane Smith PC. But if someone has a definitive cite I wouldn't mind be wrong on this one.

Gilmore, one other angle on this. Whenever I review and edit clients' existing stock plans, as well as bonus arrangements, I almost always will see a provision that says that the comp from awards under the plan or arrangement will not be counted as comp for purposes of benefit plans "unless the benefit plan specifically says otherwise." Those provisions are usually pointless, because in almost all cases the benefit plans do specifically say otherwise, just in a nonobvious way.

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.

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!

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).