Ken Davis

All, What exactly is the reach of 457(f)? Does it reach normal payroll payment practices? The 457(f) regs speak of a plan as being any arrangement under which "the payment of compensation is deferred . . . ." Deferred from what point in time? Deferred from when it would otherwise be paid or be made available? For example, what if an employee is paid monthly on the first of the month following the month in which the services are performed (December earnings are paid on January 1)? The first of the next month is the normal payroll payment date. Is that payment "deferred" under the 457(f) regs? Thanks, Ken Davis Univ. of South Alabama

Yes, I agree. But, does the 20% tax apply to amounts arising under the plan during the current year, or only to amounts which have arisen in past years?

Please help me untwist my mind! The 409A(a)(1)(B) heading says "Interest and additional tax payable with respect to previously deferred compensation." The detailed rule in 409A(a)(1)(B)(i) says "If compensation is required to included in gross income under subparagraph (A) . . . the tax imposed . . . shall be increased by . . . (II) an amount equal to 20 percent of the compensation which is required to be included in gross income." So, the heading to 409A(a)(1)(B) refers to "previously deferred compensation," but the detailed rule makes no such reference. And, I can find no such reference in the committee reports (unlike the committee reports' discussion on the interest rule). In fact, the conference committee report states "The amount required to be included in income is also subject to a 20-percent additional tax." My question is whether the 20% additional tax applies to amounts which arise under the plan for the current year and are included in gross income for the current year, and thus are not "previously deferred compensation." Thanks, Ken Davis Univ. of South Alabama

Am I correct that the 20% additional tax does not apply to amounts included in income as long as the deferred comp plan meets the 409A requirements of distribution, acceleration of benefits and elections and operates in accordance with them? Thanks, Ken Davis

A new employee negotiated a deferred comp plan that defers $X per year of employment. If the employee stays at the University until he becomes vested in the state teachers retirement system, the deferred comp plan benefits evaporate and he forfeits the $X earned per year. If he leaves for any reason before vesting in the TRS, he receives the deferred comp. I don't think the deferred comp is subject to a substantial risk of forfeiture. Agree or disagree? Thanks, Ken Davis Univ. of South Alabama

We will be hiring a new employee who will pay COBRA premiums to hhis previous employer during our pre-ex period. We are considering reimbursing the employee for the COBRA premiums. It appears that Rev. Rul. 61-146 allows this to be done on a non-taxable basis. Correct? Anything else I need to know before we say we're going to do this? Thanks, Ken Davis

If you're responding to me, I didn't say anything about 409A. The thread began with my question as to whether for a state university the ONLY choice to offer a NQDC plan was to come within the boundaries of 457. The answer was Yes. Do you agree with that?

Yes, Locust, the vesting is exactly what concerns me. If 457 overrides lack of constructive receipt and the faculty pay plan is subject to 457 (and either it is or it isn't), 457(b) would be almost impossible to meet, so that leaves 457(f). Vesting with no risk of forfeiture results in immediate taxation under 457(f). Surely I'm missing something here, but I can't put my finger on it. Ken Davis

Thank you both for your replies. The specific issue I'm thinking about is a fairly common aspect of the way university faculty are paid, but I've never seen the 457 angle discussed. Faculty on a 9-month contract typically are paid over 12 months. Schools accrue a liability at Dec. 31 to account for salary earned by faculty during the fall semester, but which will not be paid until the following year. The faculty member is vested when the services are performed. It would be almost impossible to make such faculty pay plans fit the requirements of 457(b), and the right to the pay is nonforfeitable, so it seems to me that 457 would make the income taxable when it is earned (during the fall semester) and not when it is paid (spring or summer). But maybe such plans are not deferred compensation plans to which 457 aplies. Thoughts? Thanks, Ken Davis

Is 457 the ONLY choice for a state university to offer non-qualified deferred compensation? In other words, unless the requirements of 457 are met, does 457 render an employee unable to defer the taxation of income when he/she has no constructive receipt of the income? Thanks, Ken Davis

Is section 457 the only choice for a 501©(3) to offer NQDC? Thanks, Ken Davis

Sorry. I meant Q&A-7(b)(4) of Prop. Regs. 1-125-2. Ken Davis

I'm hoping that someone more knowledgable about cafeteria plans than I (which means everyone else) is able to explain something to me. Prop. Regs. 1.125-2(b)(4) is truly puzzling to me. I think the middle sentence means an FSA of an employer may only cover premiums for health plans offered by that employer, and not the employer of the employee's spouse or dependents. But what the heck does the last sentence ("This paragraph (b)(4) does not prevent premiums for current health plan coverage (including coverage under a health FSA) from being paid on a salary reduction basis throught the ordinary operation of the cafeteria plan.") mean? One commentator (in a Tax Management portfolio) stated "However, this rule is not intended to prevent pre-tax payment under a cafeteria plan of premiums under a health plan of the same employer, where the premiums are paid directly by salary reduction instead of from a reimbursement account. While not entirely clear, this prohibition seems to apply to payment of premiums for other health coverage available through the employer maintaining the health FSA plan, as well as another employer of the participant or his spouse." This isn't very clear to me, either. Is he saying that premiums for voluntary dental insurance offered by the employer (the employer also offers medical insurance) may not be reimbursed from a FSA? If the medical insurance premiums are paid through a Premium Only Plan, may the voluntary dental premiums also be paid through the POP? I hope my questions are clear, but if they aren't you know why! Help! (from the regulatory language challenged) Ken Davis Univ. of South Alabama

Is a reimbursement account type of cafeteria plan the same as a Flexible Spending Arrangement (as defined under Prop. Regs. 1.125-2 Q&A-7©)? Thanks, Ken Davis Univ. of South Alabama

Does anyone have a cite for the rule that taxable benefits provided to retirees are reported on Form W-2? Thanks, Ken Davis Univ. of South Alabama

GBurns, You are putting words in my mouth that I never said. I suggest you reread my posts in this matter and you will see that nowhere did I say I thought "that salary reduction (for this purpose) can be done without a cafeteria plan . . ." And where did I question the "Prosposed Regs, long standing tradition etc and the response by mbozek"? If I believe the answers to my question (May a salary-reduction FSA be set up outside a cafeteria plan?) leave something to be desired, then it is my right and my obligation to those to whom I report to ask for further clarification. It is your right to not offer a response. Ken

QDROphile, Certainly not to doubt your answer or expertise, but for my own education can you give a basis for your statement that a pre-tax FSA may not be offered outside the cafeteria plan rules? Thanks, Ken

I wasn't clear about the questions in my original post. Specific questions are: 1. May a salary-reduction FSA can be set up outside of a cafeteria plan? 2. What tax rules would control the taxation of the salary-reduction election? For example, must the election be made prior to earning the salary to avoid the constructive receipt rules? 3. What tax rules control the taxation of benefits provided under the FSA? 4. Any restriction on benefits that may be offered under an FSA formed outside the cafeteria plan rules? Thanks, Ken

May an FSA be offered outside a cafeteria plan? We have a salary-reduction FSA (at least, that's what we call it), and I've always heard it referred to as part of a cafeteria plan, but the question was raised when I read a sentence in the 1996 Tax Act Blue Book (where it is discussing the addition of section 106©) that said FSA may be offered outside a cafeteria plan (but did not elaborate on the point). If the FSA is outside the cafeteria plan rules, what tax rules control the taxation of benefits to the employee? Thanks, Ken Davis Univ. of South Alabama

Hoping someone can shed some light on this. Code section 125(d)(1)(B) states within the definition of a cafeteria plan that the plan benefits are limited to cash and qualified benefits. Section 125(f) states that LTC insurance is not a qualified benefit. Flexible spending arrangements are a variation of cafeteria plans. Section 106©(1) states that an employee has gross income if an employer provides LTC coverage through an FSA. So, a cafeteria plan in the form of an FSA may not offer LTC coverage and remain qualifed, but, if it does, the employee has income. What's going on here? Obviously, I'm missing something. Thanks and I hope everyone has a safe and happy Thanksgiving with their family and friends. Ken Davis Univ. of South Alabama

Health insurance premiums for coverage other than that provided by the employer may not be reimbursed by a health FSA. Does this rule apply to COBRA premiums that a new employee pays for coverage under the old employer's health plan while waiting out the pre-existing condition period of the new employer's health plan? Thanks, Ken Davis Univ. of South Alabama

Must employer contributions to a 403(b) plan be combined with employee salary-deferral contributions to a 403(b) contract for purposes of the $40K limit? The employer is a public university, so no employee controls the employer. Would your answer change if the employer plan was a 401(a) money-purchase plan? Thanks, Ken Davis

Are excess deferrals subtracted from gross compensation to arrive at taxable compensation in box 1 of Form W-2? Or is only the deferral limitation subtracted? Thanks, Ken Davis

Want to be sure I'm reading the 1.457-4© regs (and the Treasury Decision 9075 preamble to the regs) correctly. For governmental plans, the excess deferral and income earned by it must be distributed to the employee "as soon as administratively practicable" after the excess is discovered and determined. The income earned by the excess deferral is reported on Form 1099 for the year of distribution, but the excess deferral is included in gross income for the year of the deferral (presumably by way of a corrected W-2). For tax-exempt entity plans, if the excess and the related earnings are distributed to the employee by April 15 after the deferral year, the reporting is different than a governmental plan. The income earned by the excess deferral is reported on Form W-2 for the year of distribution, but the excess deferral is included in gross income for the year of the deferral (presumably by way of a corrected W-2). I'm only looking for a "Yes, Ken, that's correct (or incorrect)" type of answer, but if anyone knows why governmental plans report the earnings on Form 1099 while tax-exempt entity plans report the same thing on Form W-2, I'd love to hear the explanation. Thanks, Ken Davis Univ. of South Alabama

GBurns: I think rcline46 was answering my post from a broader view, without restricting the answer to 403(b) plans. Possibly I should have posted to another forum that could answer general questions, but I couldn't find one. Is there another such forum available? Ken Davis