kgr12

I think I know the answer to this, but just want to make sure I'm not missing something. Section III.G of Notice 2008-113 states that, in short, an "insider" is a director or officer of the service recipient or owns more than 10% of the service recipient as determined under the Securities Exchange Act of 1934. Additionally, for purposes of the Notice, it is determined "without regard to whether the service recipient has any class of equity securities registered under § 12 of such Act." Seems pretty straightforward to me that this last provision is meant to cover as insiders those who aren't in publicly traded companies (and therefore making certain corrections under the Notice unavailable due to an insider being involved). I'm working with a nongovernmental tax exempt entity on a failure to make a timely payment under a 457(f) plan in 2023 to a C-Suite executive. The executive is an officer and therefore certainly looks like an insider even though the entity could not under any circumstances have registered securities, and in fact has no ownership at all. Any way to get around the idea that this executive is an insider for purposes of Notice 2008-113?

Would the payment of COBRA premiums (in full or subsidized) in addition to salary continuation benefits be counted toward determining the amount applied to the 'twice compensation' limit in §2510.3-2(b) of the Department of Labor regulations?

Thank you Brian!

Offering employees the ability to pay for their share of health premiums on an after-tax basis is administratively burdensome, and it would be advantageous to eliminate it. Doing so of course raises several issues, the most immediate ones I can think of: 1. Can a benefits wrap plan that incudes section 125 limit the payment of medical and dental to pretax only so long as the plan otherwise offers participants a choice between taxable and nontaxable on some other benefit(s), such as disability premium payments? 2. Other than the possibility that some employees might benefit from an income tax deduction on their premium payments if paid on an after-tax basis, are there any other potential benefits to employees by making after-tax benefits available? 3. Can this be eliminated mid-year or is it better to have it take effect the following year? 4. What other issues might be lurking for the unwary? Thanks in advance for any insights!

Thanks all for your replies.

If an employer wants to offer an election period more generous than the 60 days that is minimally required, does it impact the end date for the maximum continuation coverage period? Taken to an extreme, if the employer allows an employee to elect continuation coverage up until the end of the maximum coverage period (let's say 18 months in a given case), is it correct to say that the maximum coverage period is still 18 months after the qualifying event, and that while the employer is on the hook for claims arising any time during that 18 month period if an employee so elects, an employee electing on the last day doesn't have any coverage beyond the date of the election? Does anyone see any other impacts lurking in that scenario?

Thank you for all of that Brian!

An employer offers a couple of medical benefits (medical travel, infertility) to the extent not otherwise covered by insurance and which are completely self-funded, i.e. paid entirely out of general funds and not backed up by stop-loss. There is no employee pay portion and there is no enrollment, all employees are covered by virtue of being an employee. COBRA seems to apply - the fundamental question is, what is the COBRA premium, if any, and can the employer require the employee to make an affirmative election for continuation coverage in the absence of any "premium" per se or would the employer have to offer it to all separated employees since there is no premium? The medical travel benefit is entirely new, so there's no experiential cost to the employer as of yet, but the infertility benefit has been in place for a number of years, so could you hack up the claims experience of that benefit to arrive at a "premium?" Since the employer can charge "up to" 102% of the premium cost, if it's too difficult to arrive at what the premium would be, could the employer simply decide that it will charge zero, but the employee must still make an affirmative election to continue coverage?

Thank you @EBECatty!

Sorry for some very basic questions, but it seems to me that under the 409A regs the concept of "performance-based compensation" is only invoked if there were a possibility of that compensation being deferred. In other words: 1. If there is no opportunity to defer, an employer could pay a bonus for performance over the preceding 12 months based on criteria established right before the bonus is paid without running into 409A, correct? 2. If there is no opportunity to defer, an employer can establish performance criteria for a bonus that would be paid with respect to a 12 month period that has already started without running into 409A, correct? (E.g., in August 2022, the employer establishes performance criteria for the period July 1, 2022 through June 30, 2023, and any resulting bonus would be paid shortly after June 30, 2023.) Thanks!

Thanks Former Esq., appreciate your reply. Under the 409A short-term-deferral rule, yes, it would seem that it would be taxed in 2021 since it was, in the language of the 409A regs, "actually or constructively paid" in 2021. I have two further questions though for anyone who'd like to weigh in: 1. The 457(f) regs, which came out in 2016, well after the 409A regs, state that compensation is includible in gross income in "the first taxable year in which there is no substantial risk of forfeiture." 1.457-11(a)(1). Does this trump the the 409A language regarding actually or constructively paid? Said another way, does the short-term deferral rule keep 457(f) benefits subject to SRF out of the applicability of 409A, but the language of the 457(f) regulation determine the timing of the taxation? 2. If the 409A regs do nevertheless determine the timing of the taxation, is there an argument that the benefit was constructively paid in 2020 when no longer subject to SRF, and actually paid on March 10, 2021, and therefore there is flexibility in deciding when it is to be taxed?

If he made proper catch-up contributions prior to 2020, the balance on his underutilized amount in 2020 would be $2000 ($11,500 underutilized amount - $9500 catch-up), i.e. his max catch-up contribution in 2020 would have been $2000. However, the bigger problem is that it looks like he made a $1000 catch up contribution in 2017, the year before he was eligible to do so, and because of that he exceeded the 2017 dollar limitation by $1,000. Also, 2020 would make 4 years of catch-up contributions (there really would be three years of catch up I suppose in 2018, 2019 and 2020, with an excess contribution of $1000 in 2017). There's a theoretical question then of whether there is a $2000 or $3000 balance on the underutilized amount in 2020, but the 2017 excess contribution opens up a much bigger can of worms. See Rev. Proc. 2019-19, Sec. 4.09 and 1.457-4(e)(3). See also https://www.irs.gov/retirement-plans/457b-plans-correction-of-excess-deferrals Perhaps there's some fail-safe language in the plan document characterizing the excess as 457(f)?

Does the short term deferral rule offer the flexibility to determine the year in which a 457(f) benefit is taxed? For example, if the benefit "vests" in April 2020, and is distributed to the participant on March 10, 2021, is the benefit taxed in 2020 or 2021?

Bob, thanks for that input. I believe the signing bonus is to incentivize him to take the gig, as opposed to riding off into the sunset. Luke, thanks for addressing each of those questions, and agree.

A 501(c)(3) organization forms a 100% wholly owned for-profit subsidiary. The CEO of the 501(c)(3) is retiring 12/31/20, but they want to sign him to a part-time contract with the for-profit to help get it launched effective 1/1/21. His services would be provided exclusively to the for-profit gong forward, and he would be paid from its payroll and not the 501(c)(3)'s. The services would be meaningful/substantial - probably more than 20% of full-time, but less than 40%. They want to pay a meaningful signing bonus up front, but they could be convinced to spread it out over a longer period built into the part-time salary. The contract would be for 12 to 24 months. A couple of questions/issues come to mind: Would the arrangement in any way implicate section 457 by virtue of the fact that the for-profit is 100% controlled by the 501(c)(3)? Would the arrangement in any way implicate section 457 by virtue of the fact that the individual previously was employed by/CEO of the non-profit parent? Any other issues spring to mind? Thanks for any thoughts you might have.

Apologies - mistakenly posted too soon. Starting again: Thanks for posting the link Lois. 2 things: 1. The article states that amendments can be made "prospectively." What does that mean? I'm guessing in the vast majority of cases arising out of the pandemic, the change in/end of dependent care has already occurred. Does "prospectively" mean the events have to occur after the date of the amendment? Is the "prospective" aspect even required? 2. I would make a distinction with regard to the article's references to a change in "costs" as being a permissible election change event in Dependent Care FSAs. Regs Sec. 1.125-4(f) addresses significant cost or coverage changes. While changes in cost generally will permit an election change, 1.125-4(f)(2)(iv) provides that a change in cost applied to dependent care plans "only if the cost change is imposed by a dependent care provider who is not a relative of the employee." That said, several examples in the change in coverage provisions of the regulation illustrate that many or most of the scenarios we would be dealing with in the current situation would qualify as a change in coverage even though they seem to be driven mostly by cost. See 1.125-4(f)(6), Examples 5, 6 and 7. I realize that in the vernacular a cost change is what triggers the ability to make the election change (if permitted by the plan), the terms of art in the regulations would deem it to be a change in coverage. Yes, it's semantics, but it seems important to me that it's important to identify any authority we can rely on in allowing election changes. All thoughts appreciated, particularly with respect to item 1.

Thanks for posting the link Lois. 2 things: 1.

Since a rabbi trust isn't required, in the absence of an institutional trustee, it's often better to have no trust at all. An investment account owned by the tax exempt entity that serves as the point of reference for valuing the participant's account should suffice.

457(f) plan provides for substantial risk of forfeiture solely on the condition that the participant perform substantial services for the employer through the initial or extended vesting date. In addition, the plan permits participant and employer to agree to an extension of the substantial risk of forfeiture in accordance with the requirements of the proposed 457(f) regs. More than 90 days before the initial vesting date of January 1, 2020, the parties in fact agree to a materially greater benefit that will vest on January 1, 2022. It would seem that the proposed regs would permit the participant and the employer to once agree to extend the risk of forfeiture in the same fashion provided they enter into the agreement at least 90 days prior to the January 1, 2022 vesting date. Yet, there is no explicit statement to that effect and all of the examples provided only deal with the first extension. Any limitations on (or traps inherent in) doing a second extension?

I think the proposed 457(f) regulations would preclude exchanging a 457(f) benefit for a split dollar arrangement in an attempt to bring it outside of the reach of 457(f). Proposed regulations Section 1.457(f)-12(d)(1)(i) provides, in the last two sentences: "An amount of compensation deferred under a plan that provides for the deferral of compensation within the meaning of section 457(f) and this section does not cease to be an amount subject to section 457(f) and this section by reason of any change to the plan that would otherwise recharacterize the right to the amount as a right that does not provide for the deferral of compensation with respect to such amount. In addition, any change under the plan that results in an exchange of an amount deferred under the plan for some other right or benefit that would otherwise be excluded from the participant's gross income does not affect the characterization of the plan as one that provides for a deferral of compensation."

Is there any reason that a cafeteria plan document with a health FSA couldn't (or shouldn't) provide for the automatic inflation adjustment to the dollar limit in section 125(i) rather than amending the document each year to state the dollar amount in effect? This is the standard practice in 401(k) plan documents, but most of the FSA documents I've seen for some reason specify the dollar amount without providing any automatic adjustment for inflation language.

Thank you to both of you for your replies. Linda, in answer to your question, it is based a statement in the independent contractor agreement that the amount worked would be in that range (the work actually done is documented in support of this), and also on the rate of pay in the agreement relative to annualized pay in the 36 months prior to the end of the employment relationship.

Thank you for your reply. So I think you are coming down on the side of you look at the status when the separation from service actually occurs (i.e. the individual was an independent contractor when there was separation from service) and ignore the status as an employee when the benefit accrued. Am I reading you correctly?

An executive retires with a nonqualified plan benefit, but has an ongoing part-time consulting agreement that will continue for at least one year, under which services will be provided at approximately 25% to 35% of the time put in during the several years leading to retirement. He is considered an independent contractor during the consulting period. My understanding is that this is in the gray area between more than 20% and less than 50% where there is no presumption as to whether the executive separated or not. My question is about language in the regulations (1.409A-1(h)(2)(ii)), which states that, in the case of an independent contractor, "No amount will be paid to the service provider before a date at least 12 months after the day on which the contract expires under which the service provider performs services for the service recipient (or, in the case of more than one contract, all such contracts expire);" Assuming that the employer has treated executive as not separating from service, would that "12 months after expiration until you make payment" rule also apply in the situation where an employee transitions to an independent contractor?

Interesting point how taking one position as opposed to another would affect recognition of short term deferral items, such as bonuses. Illustrates all the more how problematic the wording of the statute is. Maybe the fix is to recognize remuneration under 3121 rather than 3401? I believe the effect of that would be that 457(b) would be recognized in the year no longer subject to SRF, and short term deferral bonuses would get recognized in the year paid.