IM4ERISA

Based on your summary it appears that the employer did make a binding commitment to reimburse employees for the cost of alternative coverage in the event they were not able to remain in the group health plan. Since these reimbursements would be taxable, they would not fall under the 409A exception for non-taxable benefits. As such, I believe this commitment would fall under Section 409A the payment of a lump sum in lieu of the ongoing reimbursement would be an impermissible acceleration. Since this commitment relates to their prior employment status, I believe the taxable amounts would be reported on Form W-2, Box 12, using Code Z. It is not necessary to withhold for the additional 20% excise tax.

Thank you all for your responses. It is the case that the individual is fully vested upon a separation from service for any reason. The only way to forfeit the benefit is to work with a competitor prior to separating from service. I suspected that this would not constitute a substantial risk of forfeiture.

Thanks Peter and EBECatty. I posted this question because I have never encountered this type of non-compete provision. This plan has been in place for a number of years. I would not have been comfortable drafting the plan in this manner.

I have been presented with a 457(f) plan that relies on a noncompete provision to satisfy the SROF requirement. I understand that unlike the 409A rules, the 457(f) rules do permit the use of a non-compete as a SROF. This particular plan's SROF restricts the participant from working for a competing business while employed with the sponsor of the 47(f) plan. But the participant vests upon a separation from service for any reason. The participant is not subject to a post-employment non-compete obligation. As such, the participant is only subject to a forfeiture if they work for a competing business prior to separating from service from the sponsor of the 457(f) plan. I am also troubled by the fact that the payment is to be made "within 3 months after separation from service and the appropriate distribution paperwork is submitted to the employer." This would not appear to be exempt from Section 409A as a short term deferral and it lacks the required specified time for distribution.

Thank you! This very helpful.

I have a client who allows its employees to make a choice about cashing out their PTO bank or accruing additional time. This no doubt triggers the constructive receipt doctrine. Is it possible to use a haircut provision of 10% as a "substantial limitation" to work around the constructive receipt issue? I know that these provisions were common in deferred compensation arrangements pre-409A. However, I don't believe the IRS ever explicitly accepted the haircut approach but after losing several court battles opted for a non-enforcement approach. As such, I am inclined to advise them against using a haircut provision. Any input would be appreciated.