E as in ERISA

Yes. I think that you can have an arrangement like this that is subject to neither 409A or 423. I don't think that someone can tell you that definitively without knowing all the terms, but here are a couple of the possibilities. In some cases it might be possible to argue that the arrangement is not "compensatory" at all. In other words, this is not a benefit plan and does not confer any rights on employees to actually purchase stock/in no way obligates the employer to make it available. It is just that the employees are allowed to use the payroll system to purchase stock to the extent that it is available -- in the same way they might be able to use it to purchase a company shirt, make United Way contributions, purchase savings bonds or make a credit union deposit? Alternatively, if it is considered compensatory then it must be that it confers a right on the employee that is equivalent to an option. If you don't meet the terms of the 422 or 423 rules, then you would probably be treated as an nonqualified stock option. There is an exception to 409A for nonqualified stock options under Question 4 of Notice 2005-1. If it is not discounted, then it is likely to fit within that section. I think that it's pretty clear that there is an intent to exclude non-discounted options -- because of the exceptions for NSOs, ISOs, ESPPs. There should be some way to get there. It doesn't seem like there is much down side to this plan -- because even if it is subject to 409A but not in compliance there is not likely any compensation to subject to tax, penalties or interest? The greater risk is that a violation in this plan could taint other plans for participants (e.g., if some of the executives are also in other equity-based plans), then a violation of 409A under this plan could cause problems in those plans. Its worth someone glancing at the plan.

Look up "Solo 401(k) plans" http://www.sfgate.com/cgi-bin/article.cgi?...L&type=business

Does the sponsor or fiduciary know that you are doing this and approves it? When a service provider provides another form of product/service to the plan, there is a potential conflict of interest that could result in a prohibited transaction. There are a variety of specific exemptions that allow the product/service to be used (use of a service provider's proprietary investments, for example). Many times the exemption rests on the fact that the plan sponsor or fiduciary is the party actually selecting and approving the other product or service. That is expected to remove the conflict of interest in many cases. That may be how others get around it. That is how the selection of the plan's service provider for automatic rollover IRAs is not a prohibited transaction -- the plan fiduciary has to approve the IRA vendor. However, if the proposed IRA vendor is also the investment advisor to the plan, then it may not be exempt. To the extent that you could be perceived as being involved in the promotion/marketing of the financial advisors' services/IRA products and are possibly getting indirectly compensated for it (by getting business directed your way), you might want to make sure you're not creating risk of prohibited transaction for your plans.

Also read PL 106-244 re clarification of church welfare plan under state insurance plan...

I'm just piggybacking off the way the IRS is discussing it. They are indicating that vesting is a fairly irrelevant event for 409A plans. People seem to be getting confused about that since there is a lot of discussion about vesting -- particularly for grandfathering and now the definition of deferral of compensation and rule on short term deferrals. So they're trying to drive the point home that for a plan that is subject to 409A and complies with the rules, it is distribution not vesting that is important. The bottom line is that, yes, compliant NQ plans (non-457(f)) will be taxed like they were under the old rules. Frankly, I don't think that the rules are that different than the way that the IRS and conservative practitioners thought that people should be operating their plans all along. They've just been codified -- and complicated with transition rules and grandfathering. For 457(f) plans its more complicated, because plans are subject to taxation under both sets of rules and the definitions of substantial risk of forfeiture appear to be different (409A is very clearly limited; 457(f) is just not well-defined so plans are using more aggressive SRFs). The answers to these questions are very fact specific. I read the original question as indicating that the risk had already been rolled once ("What is the effect if 457(f) sponsor rolled risk of forfeiture prior to enactment of 409A"). If that is true, then the money was probably vested for 409A purposes at 1/1/05, because a rolling risk of forfeiture is not a valid SRF for 409A purposes. When cj indicated that there had been no roll yet, then the answer changed (assuming the original SRF was valid).

Yes. That's my understanding -- for 409A purposes. 1. Yes, if the terms of vesting are a valid risk of forfeiture for 409A. Under Q&A-4 of Notice 2005-1, there is no deferral of compensation/the plan is not subject to 409A if it pays out shortly after there becomes a legally binding right to it and/or a valid risk of forfeiture lapses. See Q&A-10 for risk of forfeiture definition. 2. Yes. Vesting is not a taxable event under 409A. As long as the plan satisfies 409A, you don't tax until the distribution. This works for participants who plan to terminate or retire. It might not work for participants who aren't certain of termination. The bigger risk is under 457(f). The IRS could audit the plan and say the rolling risk is not valid for 457(f). Therefore, it's taxable in 2006 -- under 457(f). Then its not clear what part is taxable for 409A in 2008 (nothing because already taxed, additional earnings)

I think that the IRS said that non-qualified ESPPs (ones that don't meet 423) are subject to 409A nonqualified deferred compensation rules.

409A does not generally tax at vesting. It taxes at distribution. Vesting is generally irrelevant for 409A. There is an exception is if distribution occurs at the time of lapse of a risk of forfeiture that is valid for 409A. In that case, vesting is relevant because it excepts you from the definition of deferral of compensation and you are not subject to 409A. No requirement to comply with limits on timing of distribution. It doesn't sound like you meet the exception. You have no valid risk of forfeiture for 409A. So you have a deferral of compensation and are subject to the limits on timing of distribution. The plan needs to be amended to comply. If you don't bring the plan into compliance with 409A, then you probably have taxation and penaltes at January 1, 2005, under 409A. If you bring it into compliance with 409A, then you defer taxation under 409A until distribution. But in the meantime you could have taxation under 457(f). And as QDROphile notes, the rolling risk is probably questionable under 457(f). But that's a different discussion.

The rolling risk would not be a substantial risk of forfeiture for 409A. So if the plan does not pay until the risk lapses, there will be deferral of compensation and the plan will be subject to 409A. It has to comply with the 409A deferral and distribution rules. The timing of the distribution has to be set in stone in advance -- with the possibility of five year delay. It would be potentially be taxed at distribution under 409A. However, 457(f) simultaneously applies. Assuming that the rolling risk is valid there, then it will be taxed at the lapse of the risk under 457(f). That may be sooner or later than the taxation under 409A at distribution. They haven't clarified how those rules coordinate and what you tax at the time that the later of the two rules applies. Whether you cut off taxation of earnings on the amount taxed earlier or whether you capture them at the later date...

My understanding was that the IRS stopped approving that design in standardized prototypes after they were made aware of that issue.

What plan? The new company started a plan? If there were more than 100 participants at the beginning of the plan year, then an audit would be required. (If participants were immediately eligible). The 7 month rule doesn't eliminate the audit requirement. It only permits a delay in the timing of the audit (it is performed simultaneous with the next 12 month period). That might make it a little cheaper.

"Fully insured" is very limited for pension purposes. It does not apply simply because insurance products are used for funding. They need to be allocated contracts where each participants benefits are guaranteed. See DOL regs 2520.104-44(b)(2) The 5500 instructions say: For purposes of the annual return/report and the alternative method of compliance set forth in 29 CFR 2520.104-44, a contract is considered to be ‘‘allocated’’ only if the insurance company or organization that issued the contract unconditionally guarantees, upon receipt of the required premium or consideration, to provide a retirement benefit of a specified amount. This amount must be provided to each participant without adjustment for fluctuations in the market value of the underlying assets of the company or organization, and each participant must have a legal right to such benefits, which is legally enforceable directly against the insurance company or organization. For example, deposit administration, immediate participation guarantee, and guaranteed investment contracts are NOT allocated contracts for Form 5500 purposes.

Because its hard for the plan to find a vendor to accept the auto rollovers.

My gut reaction would have been that it doesn't automatically apply to terminations. The "event of distribution" for a cashout is normally the termination of the participant. And I think that most cashout provisions would be couched in those terms -- something like the IRS' language: "If an employee terminates service, and the value of the employee's vested account balance ... is not greater than $5,000, the employee will receive a distribution ...." The plan termination is a different "event of distribution." A plan that does not have cashouts would not be an "eligible plan" under 401(a)(31)(B). It could still make distributions upon termination. But since its not an "eligible plan" I don't think that it would have any auto rollovers. If those plans don't have auto rollovers upon termination, then I don't see why a plan that has voluntarily chosen to have mandatory distributions upon termination of employment would be required to also rollover the distributions upon termination of the plan. If a plan is terminated while the company is operational and employees have not terminated, then I think that most cashout provisions would not apply. But the language in 411(a)(11) and 401(a)(31)(B) doesn't really flow well to clarify this. And in some cases participants might be terminating when the plan is terminating.

But be careful of those terms "stock deal" and "asset deal" in today's tax world. With check the box rules and "disregarded entities," then the purchase of a single member interest in an LLC that is disregarded is considered an "asset sale." But technically it is a purchase of the interest in the legal entity. So I would assume legal sponsorship, etc. transfers with the entity. But I don't think that there has been clarification. Ideally, the contract covers it, as mbozek states.

Even if two companies don't file a consolidated return (because they are not both C-Corps), there are still ways to "share" and allocate tax attributes. The example that comes to mine is where a tax exempt files a 990-T for taxable income and there is a taxable C-Corp subsidiary. They both attach schedules to the back of the returns showing how they share and allocate "tax attributes" -- like certain tax brackets, expensing of depreciable property, etc. I imagine that this is a tax attribute that they can share and allocate. Not one that is normally on the schedules. But possibly could be. Ask them how they report those other items.

I was thinking that is was a general reference -- a play on the "brown paper wrapper" language -- suggesting that these ideas are "tax smut."

The final regs provide the answer on what happens when he returns and makes up contributions 1.401(k)-2(a)(5)(v) Additional elective contributions pursuant to section 414(u). Additional elective contributions made pursuant to section 414(u) by reason of an eligible employee’s qualified military service are not taken into account under paragraph (a)(4) of this section for the plan year for which the contributions are made, or for any other plan year.

This mentions both Carol Gold's memo and the "brown envelopes" http://www.irs.gov/pub/irs-tege/se_020705.pdf

For the reporting issue, I think that question 26 of Notice 2005-1 indicates that the generally rule is that they woud be reported, unless they are in fact non-quantifiable. They may be harder to quantify than account balance -- but that does not make them nonquantifiable. You use FICA regs 31.3121(v)(2)-1©(2) methods -- calculate present value using normal form of benefit, actuarial assumptions and methods, etc. Under 31.3121(v)(2)-1(e)(4)(i)(B), it will be ascertainable if you know the amount, form and commencement date (and you use certain assumptions to supply those terms if not exactly known). I think that the deferral election rules only apply if there is actually a deferral election by the participant. For employer funded plans I think those rules don't apply.

Corbel was smart enough to apply the amendments to DISTRIBUTIONS after March 28. I think that is a better answer. http://www.sungardcorbel.com/News/Docs/IDPRolloverAmend.doc

I don't know if this link works, but I asked a similar question here. And I don't think anyone answered. http://benefitslink.com/boards/index.php?s...opic=27448&st=0

So is anyone making a "retraction"?

I don't understand some of these comments. Is there a suggestion that if the company pays one participant's plan expenses, then that is always still a valid deductible business expense for the company? I think that if the company pays it for all employees then it is valid and deductible. But if they are only paying them for one, then they are probably not going to want to characterize it as a plan-related expense or they run into the discrimination questions. So I'd think that they'd probably want to end up characterizing it in such a way that would make it taxable to the participant and/or nondeductible by the business.

I don't have the answer. But it is an interesting question. What if nonhighly comped were eligible for an employer plan and highly comped weren't. Then the employer has a new profit sharing with what is supposed to be a one-time election. It isn't excluded from the 401(k) rules for the nonhighly comped because its not a one-time election since they were already eligible. But it is a one-time election for the highly comped