XTitan

Thanks - that was my conclusion too.

It is kind of amusing. The argument can be made that life insurance premiums are special because the final regulations generally provide that a nonqualified deferred compensation plan for purposes of section 409A does not include a qualified plan, a bona fide sick leave or vacation plan, a disability plan, a death benefit plan, or certain medical expense reimbursement arrangements. Don't see golf fees in the list of exclusions.

A 162 bonus arrangement is an arrangement where the executive owns a life insurance policy and the company pays the premium. The premium is treated as compensation under section 162. Once an executive is retirement eligible, the plan mandates that the company will need to continue premiums until certain funding guidelines are satsified. Does this arrangement fall under 409A? Argument that says 409A does not apply This is a life insurance arrangement which is exempt from 409A Argument that says 409A does apply The executive has a legally binding right to post-separation compensation (the life insurance premiums). The exemption for death benefit plans doesn't apply because the policy has cash value.

That happened at my firm, and our counsel said it wasn't a CIC.

He's giving you the definitions for the COLI Best Practices provisions. These are the requirements for COLI to have tax free death benefits and is completely unrelated to the definition of HCE for any other purpose.

Since this is the first year of eligibility, 1.409A-2(a)(7) seems on point: For compensation that is earned based upon a specified performance period (for example, an annual bonus), where a deferral election is made in the first year of eligibility but after the beginning of the performance period, the election must apply only to the compensation paid for services performed after the election. For this purpose, an election will be deemed to apply to compensation paid for services performed after the election if the election applies to no more than an amount equal to the total amount of the compensation for the performance period multiplied by the ratio of the number of days remaining in the performance period after the election over the total number of days in the performance period.

414(q) 110,000 and 416(i) 160,000 (Guess we all have our favorites)

Haven't gotten too far on the details yet, but the thought is to argue the lump sum equivalent will be reduced for FICA that needs to be withheld effective 12/31/2008 (suitably grossed up for income tax withholding). Hate to do it 1/1 to avoid OASDI.

Company has a nonqualified DB plan. Company is thinking of converting to a nonqualified DC plan by treating the lump sum equivalent as of 12/31/2008 as the opening balance for the DC plan. Distribution elections will be solicited and will be effective 1/1/2009. No one sees any problem with this under transition guidance (in some way, conversion is similar to changing the investment options). However, the company asked whether they can solicit elections on whether the participant wishes to have their plan moved from the DB to the DC? As an alternative, the company wants to know whether they can mandate this only for those currently under a specified age. I can't figure out any way to accelerate distributions to 2008, but something about either option bothers me. Any thoughts?

The 20% is applied to all amounts that are recognized in income due violating 409A. Notice 2007-89 indicates for 2007 that the inclusion date would be as of 12/31/2007 and would include all amounts not previously recognized as income and not subject to a substantial risk of forfeiture. That would include amounts earned in 2007 and all prior years that meet the criteria. Presume the same would be true for 2008. Always ignore the heading on the sections. They are meant to be informative, but they can't be relied on in a court of law (they aren't controlling).

Isn't this an alternative to doing a discounted stock grant, but instead of reducing the grant price there's an enhancement to the redemption price? Under that analysis, you'd need a time and form of payment at the time of grant, right?

The distinction is that 457(b) plans are nonqualified plans, so the FICA rules under 3121(v) apply.

That just tells you that my weekend is going about as smoothly as yours. Participate in other plans or eligible for other plans? Might make a difference. Changes to the time and form of payment upon death, disability or hardship are not subject to the 5 year delay (just the 12 months prior). Being in a transition year makes the 1 year/5 year moot anyway. The 30 day rule with respect to ad hoc grants should apply, provided there is at least 12 months between date of election and date of vesting (NRA). The 30 day rule for initial deferral elections wouldn't apply because that's only for services performed after the election.

Allowing the participant to elect the form of the death benenfit is common, but it needs to be made prior to earning a legally binding right to the benefit, which should have been at the time this benenfit was negotiated. I'd be concerned about using the 30 day rule in case the employee is already participating in a plan in which this plan can be aggregated with. Such an election doesn't need to be irrevocable; changes can't take place for at least 12 months, but it is not subject to the 5 year delay. Given we are in a transition year, I'd consider soliciting an election and/or amending the agreement to provide a default payment, depending on what counsel is more comfortable with. You might also want to specify what happens if death occurs post-separation while in payout.

I've got a few other things I've written I may post from time to time. I just couldn't let the 20th anniversary of MEC rules go without some sort of celebration, and the song wrote itself. Anybody who thinks that makes sense has been in this industry way too long and needs to get a life as much as I do!

To the tune of Sgt. Pepper's Lonely Hearts Club Band It was 20 years ago today When Congress had to have a say That they really don't like single pay So they want to make it go away They voted on TAMRA back then, so we're celebrating it today It's seven-seven-zero-two-cap-A It's seven-seven-zero-two-cap-A Where MEC rules are all codified Seven-seven-zero-two-cap-A Who knew endowments could be modified? Seven-seven-zero, Seven-seven-zero Seven-seven-zero-two-cap-A Watch out when taking income The tax rules have been bent Withdrawals can be taxable and loans plus ten percent So when know all the facts You can't avoid the excise tax Unless you hold the policy Death benefits are tax-free Pay attention to the seven pay and don't change it in any way It's seven-seven-zero-two-cap-A

Thanks, I figured as much. I remembered when the source tax issue was debated that the 10 years represented a good compromise (i.e. no one was happy).

With Minnesota recently enacting their law to tax nonresidents on MN-earned NQDC money paid out in less than 10 years, is anybody hearing whether this is an isolated incident or whether this is a trend? I haven't heard of any new states looking at this, but maybe someone in this group has. Anyone have a good source tax source by state?

Yeah, curse that OP! Normally of course it doesn't matter - it's the possibility of crossing the tax year that may reach a tax result (timing of the year of income inclusion) that is either favorable or unfavorable to the key employee. I thought the potential for triggering constructive receipt for inclusion in the current year while making the actual payment in the following year, thereby creating taxation under 451 without 409A penalties, an intriguing situation. Now let's amend those plan docs to say 1st day of 7th month following separation and move on to more important dialogues.

Let's say the separation date has to be June 30, so we can't avoid the question. The way I read 409A(a)(2)(B)(i) is that the payment cannot be made before 6 months following separation, so it can be made on the 6 month anniversary (monthaversary?). I know the regs permit the payment to be made on the 1st day of the seventh month following separation, or each payment can be delayed 6 months. That doesn't help determine the 6 months. I'll chalk this one up to needing more guidance that likely won't happen. It's a curious thought as to whether the payment that should be made in December but isn't made until January creates tax in 2008. Is the "should" enough to trigger constructive receipt in the same way as "you were paid 12/31, but the check was in the mail." I can imagine instances where a participant might want to be taxed in 2008 while another in 2009. An interesting intellectual exercise.

No fair changing the question - the payment is in January. .

1) Key employee intends to separate from service on June 30, 2008. Since distributions may not be made prior to the date which is 6 months after the date of separation, what's the earliest date payment may be made without violating 409A (not the safest date), based on the based available guidance? a) December 30. 2008 b) December 31, 2008 c) January 1, 2009 2) Suppose the payment is not actually made until January 15th. What is the month of constructive receipt for 451 purposes? a) December 2008 b) January 2009 Assume there is no collusion between employer/employee to determine the timing of the distribution for tax year purposes. I have a hunch that there is an argument that the employee can be constructive receipt in 2008 without violating 409A.

When I hear leveraged, I wonder if there are Sarbanes issues with a company potentially being construed as indirectly arranging for a loan.

I started looking into this last summer, and got as far as finding these old documents on the NJ web site that says NJ follows the federal law on constructive receipt for unfunded DCPs, but not for 457 plans. Hope this helps. summer95.pdf winter95.pdf

Here are the 12 - steps: 1) I will never get into conversations as to whether it is 409A or 409-Cap-A. 2) I will never pronounce Dan Hogan's name in a Colonel Klink voice. 3) I will not respond to transition relief with, "Oh no! Not again!" 4) I will not engage in debates whether nonqualified needs a hyphen. 5) I will not correct the use of "hardship", even though I know it means "occurrence due to an unforeseeable emergency". 6) I will not care whether leap year impacts the 6 month or 12 month rules. 7) I will not print out all the Notices, proposed regs, and final regs just to see the look on a client's face when they hear the sound of the stack hitting the table. 8) I will avoid conversations asking how the underpayment penalty is really calculated. 9) I will respond to every question with "What does the plan document say?" and ignore the eye rolling. 10) I will preface every response with "I don't give legal advice, but...". 11) I will not demand additional transition relief must push the compliance date out 5 years (maybe). 12) I will not ask my employer whether our company plans are 409A-compliant.