XTitan

Another consideration is how the value of the policy is being measured, whether it's by the cash value or some other measure. Shouldn't have a transfer for value issue since the policy is being transferred to the insured, and the company will still need to withhold taxes on the value of the distribution (whether from the policy or other sources).

Probably not.

Without knowing all the facts, every objection I could think of (in theory) is contained in the GLAM @EBECatty posted.

Given these plans are unfunded, "setting aside" funds just means the organization has some extra cash. It's not directly to the 457(f) plan now or in the future. Whatever contribution is to be made to the 457(f) plan can be completely discretionary. As @EBECatty rightly points out, you need a substantial risk of forfeiture prospectively to delay taxation to a future date (presumably vesting in a lump sum to stay outside 409A).

You are correct. Earnings attributable to balances that have vested are not included in box 3 & 5; just the portion attributable to the newly vested piece would be included in Box 3&5.

I'll take a stab at this in a purely non-advisory way. If you go by the proposed income inclusion regulations from Dec 2008, I suppose you can argue that those payments that were properly included in income do not factor into the 20% additional income tax or underpayment penalty, and you are generally only going back 3 years to the last open tax year to run the calculations. Correcting a past W-2 with a different Boxes 1, 3 and 5 should be triggering the need to refile, and the obligation of box 12 code Z reporting falls to the employer. So, is there anything in the documents that can interpret the missed earnings payments as forfeited? Paying a CPA more than the additional taxes due seems ridiculous.

Notice 2008-113 lays out the opportunity to correct inadvertent operational errors under 409A over a period of 2 years from the date of error without imposing full 409A additional income taxes. Check out https://www.irs.gov/pub/irs-drop/n-08-113.pdf and review either section VI.C or section VII.D depending on the magnitude of the error and make sure the correction is done before year end. Don't forget to review section IX as well as the IRS will need attachments to the tax forms to describe the error.

What's being reported? Taxable income, new deferrals or balances? Which box is the information being shown in? 409A did mandate informational reporting that has been suspended since 2008 (and was not required before that), and I have heard of at least one provider who was reporting the balance for a while (incorrectly it turned out).

There is a fine line between a non-elective account balance plan and a non-account balance that you've described above from the participant's view since mechanically it looks the same. If you cast as a non-elective account balance plan, adding an interest component shouldn't be an issue. Another way of looking at it is as a substitution of one benefit for another. You note that you are keeping the time and form of payment the same so under a facts and circumstances test you should be able to argue you comply. Side note - crediting interest based on the S&P with a floor could give you FICA issues as you aren't basing the earnings on a pre-determined investment or index; it would be treated as another employer contribution subject to FICA.

Check whether the phantom stock arrangement actually constituted a short-term deferral plan exempt form 409A (e.g. paid in a lump sum upon vesting). Otherwise, it sounds like a voluntary termination subject to the one year/two year/three year rule.

The only other item I'd add is whether 4% is "reasonable" and whether any portion of the 4% earnings after the balance is taken into account is still subject to FICA.

I think the answer ultimately lies in the wording/interpretation of the document (or at least what is implied). In a vacuum, I can see arguments for 0%, 10% and 20%.

The devil is in the details. In general, a company can "freeze" A NQDC plan (not permit new deferrals) without terminating/liquidating the plan, as long as this is done in compliance with 409A if the plan is required to comply.

Today I learned ANPRM = Advanced Notice of Proposed Rulemaking

Yes, all tax consequences flow back to the grantor. The custodian should provide the necessary tax reporting (1041) to the grantor to be able to file the appropriate taxes.

Now you have to find the written determination that said it was okay not that it would help narrow down the search. Looking at the Section title offers no clues as the acronym doesn't spell out anything (unlike ERISA) - MINIMUM AGE FOR DISTRIBUTIONS DURING WORKING RETIREMENT.

By "funded", I assume you mean "informally funded" and that the assets are not actually set aside and guaranteed to pay benefits. Since they are merely earmarked to pay benefits, they are accounted for no differently than any other corporate asset.

It really depends on the terms of the plan. For example, pre-2005 DC plans with no additional employer or employee contributions that continue to grow or shrink based on market performance can remain grandfathered.

When you say an old agreement; how old? Is there any possibility that the plan is grandfathered and does not need to be brought into compliance with 409A? I know the information you seek is specified in Notice 2010-06, Section V, but since payments have already commence pursuant to separation (which may or may not compliant with 409A), the language may not be helpful. 409A does provide that the employer is required to encode 409A violations on the employee's W-2 Box 12, Code Z. I'm not one to speculate as to what happens if violations are not reported in a timely manner or at all. n-10-06.pdf

Post-separation, many employers ultimately remove their folks from payroll if there only remaining benefit is nonqualified distributions. Having the Rabbi Trust process distributions, withholding and W-2 (and possibly interacting with the individuals directly for W-4 info) can simplify the process. All depends on the needs of the employer I suppose. As for reimbursement, you are correct that adding that provision is a sight modification from the model trust guidance. But conventional wisdom is the trust is in the same place whether the trust pays the participant or the trust pays the client who already paid the participant. There are rare cases where the client rejected the reimbursement clause in the trust because they (their counsel) refused to deviate from the model trust.

My experience is that the Rabbi Trust will provide the employer information for the employer to do the 941 filing but will provide a separate W-2 to the participant. That seems to be pretty consistent. The trust I work with most will withhold and remit federal and state income taxes only and will leave it up to the employer to handle FICA and local taxation, as applicable.

As long as there isn't anything that would compensate the participant for the reduction (which could be viewed as an acceleration of benefit), it shouldn't be an issue under 409A.

Actually, IRS limits are based on CPI-U while Social Security increases are based on CPI-W.

No changes this century. Out of curiosity, are you talking about a defined contribution or a defined benefit NQ plan? For a DB plan, once the benefit is readily ascertainable, then the amount is subject to FICA in a lump sum (effectively the present values of expected benefits) as opposed to withholding FICA on the amount of each distribution.

I think it's a little messy if, the day before the change of control, someone quits because the stock price is down, as opposed to getting a lower balance the next day if they don't quit. But I don't see the toggle rule applying either.