XTitan

In the land of the theoretical, if the company advances cash to an employee and the employee pays it back, it's technically a loan. To avoid an interest-free loan, you have to use a real interest rate and have the employee pay real interest. In this light, the interest isn't a windfall. On the whole, I'd rather pay a little interest on the advance payment than have full 409A violation on my entire balance.

For context, the complete quote from the Audit Guide is - When examining the answers and documents received in response to these questions, look for indications that -- a. the employee has control over the receipt of the deferred amounts without being subject to substantial limitations or restrictions. If the employee has such control, the amounts are taxable under the constructive receipt doctrine. For example, the employee may borrow, transfer, or use the amounts as collateral, or there may be some other signs of ownership exercisable by the employee, which should result in current taxation for the employee That doesn't say that the employee may borrow; it says that if there is language in the plan that says that an employee may borrow, there is constructive receipt and current taxation. Since final 409A regs came out after the publication of the audit guide, if the plan is subject to 409A, you might want to review the language in §1.409A-3(f) as well.

Stopping deferrals due to "mistaken" eligibility is as problematic as stopping deferrals due to a bona fide loss of eligibility (demotion/transfer); there is no 409A provision that allows for a cancellation of deferrals except for disability or unforeseeable emergency. Too many concerns about games-playing opportunties. And, 409A doesn't "care" about top hat considerations. May be able to use the limited cashout provision under §1.409A-3(j)(4)(v) if the amounts are small enough. As for missing an eligible, as long as the plan allows for special contributions, doesn't seem to be a problem to grant a special contribution, provided a timely distribution election is made.

There is nothing in 409A that states that deferral elections are cancelled on separation from service, and the initial deferral eligibility rules don't apply if the employee participated in the 24 months prior to rehire.

Let's at least throw in 1989 for the first 401(a)(17) limit at 200k.

The limited cashout provision says in part "a plan may require or provide a service recipient discretion to require (or be amended to require or to provide a service recipient discretion to require)..." If the plan doesn't provide a limited cashout provision now, sure looks like the plan would need to be amended to provide, which you say they can't. So I think the answer is there are anti-acceleration issues for both 1 or 2. I also think the offer to allow a participant to decide whether to receive their balance today or continue to let it ride raises some constructive receipt issues whether they take it or not.

Psst - Did someone say "optimizing our core values" yet?

Generally yes. See §1.409A-2(b)(1)(ii).

In a completely unrelated note, the time the initial topic was posted was on 1/11/11 at 11:11 AM.

Client has a payroll cycle where the paycheck for final payroll period which ends 12/31 is paid in the first week of January. Their deferred compensation plan states that deferrals for the final payroll period are attributed to the prior year when earned, not paid, to comply §1.409A-2(a)(13). The client inadvertently neglected to deduct any deferrals from the first January 2011 paycheck that was attributable to December 2010 wages. They are planning on correcting by deducting from the next January paycheck. There are no insiders and amounts in question area all less than 16,500 for each individual. Under Notice 2008-113, does this fall under IV.A as a correction of a missed deferral in the same tax year (2011) or under V.B as a correction in the subsequent tax year (a deemed deferral for 2010 corrected in 2011)? I can argue both sides so I'm letting the client's counsel be the tie breaker, but I'm curious if there is a right answer.

Now now - the SS trust fund is supposed to be made whole via transfers from the General fund, and the IRS did get out guidance today, so they are being thoughtful (yeah, I don't think I can say this with a straight face...)

Closest thing that applies looks like section VII (see examples 10-13 under G). I would of thought that section IX applied since that's what the title says in the table of contents, but that section applies only to initial deferral elections (even the title changes).

If this a correction under 409A (see Notice 2008-113 and Notice 2010-06), such an explanation would be necessary to attach to a 1040 as part of the corrections program to avoid 409A-related additional taxes.

Maybe there is a one year moratorium on pension limits, kind of like the estate tax this year - 2010 is a good year to die and 2011 is a good year to save for retirement? Then, in 2012, Congress retroactively revises the 2011 limits, thereby creating full employment for everyone on this board.

And even though the September 2010 index value was announced this morning at 218.439, which means that the limits shouldn't adjust, still no official announcement from the IRS. Sigh.

According to my paystub, it's calculated on gross compensation less 125 deductions but before deferrals.

Generally the carrier has a form that needs to be signed by the parties involved.

Would it cover Short-Term Disability?

Depends on what the error is and how soon it can be corrected. Generally, operational errors (Notice 2008-113 as amended by Notice 2010-06) can be corrected within 1 year without penalty or within 2 years with the 20% additional income tax due only on the amount in error, in exchange for the employer and employee(s) involved filing an attachment to their tax returns explaining the situation. The errors in the Notice are limited to over/under deferring and paying too soon/too late. Compared to exposing the entire balance to 20% additional income tax plus premium interest tax dating back to the date of deferral, I'd say the relief is pretty generous. Hope that helps.

Reporting is not the same. From the 2009 1099 General Instructions Distributions from a nonqualified deferred compensation (NQDC) plan to an estate or beneficiary of a deceased plan participant are no longer reported on Form 1099-R. They should be reported on Form 1099-MISC. Where would you report the Fica and medicare taxes then? Since FICA is assessed upon earning, not distribution, there's usually nothing to report. Certainly in some non-account balance plans, excess earnings, or accelerated vesting cases you could have FICA due. In the year of the employee's death, if there is any deferred comp that is subject to FICA, it would also be reported on the employee's final W-2 in addition to reporting on a 1099-MISC (according to the W-2 instructions and revenue ruling 86-109). Payments after the year of death aren't subject to FICA, just 1099-MISC reporting.

Ah - that would be Desiree by Neil Diamond

Conjunction Junction, what's your function? Couldn't resist...

The change in control definition in the final regs doesn't depend on the value of the company, so this suggestion doesn;t seem to work. Looked at another way, what it sounds like more is that they want to create two different payment methods triggered upon change in control - above the threshold participant is paid one way, and below participant is paid another way. That sort of toggle doesn't seem available.

I vote for amending the 2007 W-2 and no plan earnings credited since that date, with the hope final regs clarify.

As long as the company isn't a TARP recipient that still needs to repay TARP money or a health insurance company, then yes.