A company has several ex-employees who were promised they could stay on the employer's group health plan until death or, in the alternative, be reimbursed for cost of substantially similar coverage until death. The insurer finally caught on and kicked these people off the group health plan. Company does not want to reimburse these people every year for the next 20+ years and wants to buy out this privilege in a lump sum. They used actuarial calculations for various people's expected demise, and also certain assumptions about how insurance costs will increase over the next 20 years, to come up with rather significant lump sum payouts ranging from $50,000 to $500,000. They want to make these payments to non-employees without paying any tax on them. They asked me to structure it as a legal settlement, and I declined to do so.
I advised this lifetime payment stream was deferred comp and absolutely subject to taxation (after the first 18 months of COBRA, which I understand can be provided tax free). I also advised that by paying a lump sum, they are accelerating the benefits in violation of Section 409A so these people getting a $500,000 check are going to owe self-employment tax, income tax, and an additional 20% excise tax. Does anybody disagree with this assessment?
So then the employer said they'd bump up the lump sum to cover all the taxes, so that one individual (who is in a 35% tax bracket and a 10% state bracket) would get a 35% fed + 10% state + 20% excise + 15% FICA bump for a cool buy out of $900,000.
I've been trying to figure out how the employer should report this? I've seen that deferred comp is reported on Box 1 of 1099-NEC. But I've also seen that Section 409A failures and penalty are to be reported on Box 15 of 1099-MISC. Are these people going to get 2 different 1099s? And in my example, would the 1099-NEC show the full $900,000 but the 1099-MISC only report the $500,000 (prior to the bump up for taxes)?