XTitan

I thought 59 1/2 followed the rules for 70 1/2 which is 6 months following the 70th anniversary of the individual's birth as per Treas. Reg. 1.401(a)(9)-2, Q&A 3: Q-3. When does an employee attain age 70 1/2? A-3. An employee attains age 70 1/2 as of the date six calendar months after the 70th anniversary of the employee's birth. For example, if an employee's date of birth was June 30, 1933, the 70th anniversary of such employee's birth is June 30, 2003. Such employee attains age 70 1/2 on December 30, 2003. Consequently, if the employee is a 5-percent owner or retired, such employee's required beginning date is April 1, 2004. However, if the employee's date of birth was July 1, 1933, the 70th anniversary of such employee's birth would be July 1, 2003. Such employee would then attain age 70 1/2 on January 1, 2004 and such employee's required beginning date would be April 1, 2005. If that's the case, then in your example, 59 1/2 would be 1/1/2020.

This it? Employee_Plans_Determination_-_Quality_Assurance_Bulletin.pdf

Determining the top hat group is not so easy. ERISA defines as "a select group of management or highly compensated employees", but the reference to "highly compensated employees" doesn't (necessarily) mean anyone making over 414(q). DoL hasn't provided a lot of guidance, and court cases generally refer to qualitative and quantitative analyses. For example, in Bakri v. Venture Mfg. Co., 473 F.3d 677 (6th Cir.2007), the Sixth Circuit listed the qualitative and quantitative factors to consider when determining whether a plan qualified as a top-hat plan under ERISA section 201(2): (1) the percentage of the total workforce invited to join the plan (quantitative), (2) the nature of their employment duties (qualitative), (3) the compensation disparity between top hat plan members and non-members (qualitative), and (4) the actual language of the plan agreement (qualitative). So, you can't really say that the top 10%-15% in compensation with a title of Director and above will automatically be a top hat group, but that might be a good starting place for the ERISA attorney.

I have had many wonderful conversations with ERISA attorneys who have zero NQ experience. A suggestion to a client to find more experienced ERISA attorneys who are more familiar with NQ is generally met with great appreciation...

I actually didn't think there was a good alternative to SH, but I recognize I don't know what I don't know. I'm not surprised an ERISA attorney would push back. There is a lot of nuance to the NQ regs that specialists can understand, but it might be tough to fathom for an ERISA attorney who focuses only on qualified plans.

NQ plans not very popular? Ok, I'm a little biased. Maybe a lot. NQ surveys I've seen say 80%-95% of respondents have NQ plans at their companies so one could say they are as popular as they've ever been; they haven't been legislated out of existence (yet). It's true NQ plans have risks not found in qualified plans. It's true the plans are unfunded and subject to a nonpayment risk. It's also true that plans can be designed to provide deferral opportunities for the select group with creative match and vesting provisions. But it does require expertise to design, implement and record keep. Based on the numbers of HCE, NHCE, and ineligibles, I'm guessing that if a 401(k) plan were implemented that the safe harbor contribution would be too expensive, but without it, the HCEs will be severely limited in their contributions. If this is right, then a NQ plan can address the retirement needs for the HCEs. But I'd prefer to see how the right qualified plan can address this first.

Try http://www.legalbitstream.com/

Yes, payment is taxable in 2019. CuseFan has it right; the language about short-term deferrals is trying to avoid application of the of 409A to a simple payment.

For completeness - bold paragraph is what is being discussed 4 U.S. Code § 114 - Limitation on State income taxation of certain pension income (a) No State may impose an income tax on any retirement income of an individual who is not a resident or domiciliary of such State (as determined under the laws of such State). (b) For purposes of this section— (1) The term “retirement income” means any income from— (A) a qualified trust under section 401(a) of the Internal Revenue Code of 1986 that is exempt under section 501(a) from taxation; (B) a simplified employee pension as defined in section 408(k) of such Code; (C) an annuity plan described in section 403(a) of such Code; (D) an annuity contract described in section 403(b) of such Code; (E) an individual retirement plan described in section 7701(a)(37) of such Code; (F) an eligible deferred compensation plan (as defined in section 457 of such Code); (G) a governmental plan (as defined in section 414(d) of such Code); (H) a trust described in section 501(c)(18) of such Code; or (I) any plan, program, or arrangement described in section 3121(v)(2)(C) of such Code (or any plan, program, or arrangement that is in writing, that provides for retirement payments in recognition of prior service to be made to a retired partner, and that is in effect immediately before retirement begins), if such income— (i) is part of a series of substantially equal periodic payments (not less frequently than annually which may include income described in subparagraphs (A) through (H)) made for— (I) the life or life expectancy of the recipient (or the joint lives or joint life expectancies of the recipient and the designated beneficiary of the recipient), or (II) a period of not less than 10 years, or (ii) is a payment received after termination of employment and under a plan, program, or arrangement (to which such employment relates) maintained solely for the purpose of providing retirement benefits for employees in excess of the limitations imposed by 1 or more of sections 401(a)(17), 401(k), 401(m), 402(g), 403(b), 408(k), or 415 of such Code or any other limitation on contributions or benefits in such Code on plans to which any of such sections apply. The fact that payments may be adjusted from time to time pursuant to such plan, program, or arrangement to limit total disbursements under a predetermined formula, or to provide cost of living or similar adjustments, will not cause the periodic payments provided under such plan, program, or arrangement to fail the “substantially equal periodic payments” test. Such term includes any retired or retainer pay of a member or former member of a uniform service computed under chapter 71 of title 10, United States Code. (2) The term “income tax” has the meaning given such term by section 110(c). (3) The term “State” includes any political subdivision of a State, the District of Columbia, and the possessions of the United States. (4) For purposes of this section, the term “retired partner” is an individual who is described as a partner in section 7701(a)(2) of the Internal Revenue Code of 1986 and who is retired under such individual’s partnership agreement. (e) Nothing in this section shall be construed as having any effect on the application of section 514 of the Employee Retirement Income Security Act of 1974.

Not much legal guidance has been provided other than what was discussed in Congress at the time the bill was being debated. The following is from the House Report that accompanies the passage of 104-95: (I) Any plan, program, or arrangement described in section 3121(v)(2)(C) of the Code, provided such income is part of a series of substantially equal periodic payments made for the life or life expectancy of the recipient (or for the joint lives or joint life expectancies of the recipient and the designated beneficiary of the recipient) or for a period of not less than 10 years. Payments under such an instrument may not occur less frequently than annually. The periodic payment rule established by subparagraph (I) shall not apply to a plan, program, or arrangement which would, but for sections 401(a)(17) and 415 of the Code, be described in subparagraph A. The effect of subparagraph (I) would be to exclude from State taxation certain amounts of income paid under non-qualified deferred compensation arrangements, that is, plans which are not recognized as ``qualified'' under the tax code. These are unlimited, flexible arrangements without contribution limits, funding requirements, or limits on payout provisions. The availability and use of such arrangements is limited to a small proportion of the work force. Payments made by employers to non-qualified plans are includable in the employee's income in the year in which made, regardless of whether the employee has a right to distribution. Employers often do not fund non- qualified plans, therefore, until they are ready to make actual distributions to the recipients. Subparagraph (I) also protects from State taxation ``excess benefit'' plans that are set up because a qualified plan in a particular instance (1) would exceed the $150,000 ceiling in annual employee compensation that employers may take into account in determining contributions made to or benefits paid from a qualified plan (section 401(a)(17)); or (2) would exceed the present limits on the amount of allowable benefits from a defined benefit plan or the present limits on the amount of allowable contributions to a defined contribution plan (section 415). Defined benefit plans give employees a special benefit at retirement, commonly based on a percentage of the employee's compensation and number of years of service to the employer. The employer will annually contribute an amount that is actually required to fund the benefit at retirement. Defined contribution plans specify the amount of contribution that is to be made annually. This exemption applies without regard to whether the periodic payment requirements of subparagraph (I) are met. Looking at these explanations of the terms, it is clear that you would like your plan to be considered an "excess benefit" plan to take advantage of the exemption. The plan sponsor should confirm whether the plan was designed to be treated as such; based on the description provided, it does not seem to be. The plan sponsor needs to get this right as well as they have the obligation to deduct and remit withholding to the appropriate taxing authority.

It depends. Does the plan give the company the ability to amend the plan? If so, the company can do so likely without employee approval.

To summarize - 1) You need to find out if the plan permits changes to the time and form of the distribution. 2) You need to find out if the plan treats the 5 annual installments as a whole, or if each payment is treated individually (think of 5 separate lump sums). 3) You need to find out if the plan has any limitations on the number of payments or other restrictions on the payment stream. If the plan permits distribution changes, you are subject to the 1 year/5 year rule: changes don't take effect for one year, and the commencement date must be pushed out by at least 5 years. As CuseFan points out, if 1 is true, then you may be able to change the 5 pay to a 10 or 20 pay (subject to any restrictions you find out in 3)). It just wouldn't commence for at least 5 years from your separation, and the change won't take effect unless the you terminate at least a year the election. As jpod points out, if the plan has a provision that treats each of the 5 payments separately, in theory you may be able to make separate elections for each payment to create a new payment stream (each one would be delayed by at least 5 years and the election needs to be in place for a year). Woe to the NQ recordkeeper who would have to administer this provision.

Not a sausage.

See the rules for reporting NQ distributions in Box 11

The provisions seem very practical. You continue payments to a named beneficiary, but if it goes to the estate, drawn out payments don't help with estate administration/wind-down. That being said, I agree it's not consistent with 409A precisely for the reason you lay out. I wonder if you could argue that revoking a beneficiary designation is akin to a change to the form of payment upon death, so as long as there is a 12 month delay before the revocation becomes effective the provision works? Yeah, who wants to do that...

Not sure what you mean by "recovered"? Do you mean "assessed? Presumably you look to the general timing rule. FICA tax the portion of each distribution that is attributable to non-FICA taxed years. Assuming the life annuity was "readily ascertainable" but not FICA taxed (otherwise you'd FICA tax the lump sum equivalent when the amounts became readily ascertainable), apply FICA to the portion of each life annuity payment that is attributable to the non-FICA taxed years.

Q–13: When is remuneration treated as paid for purposes of section 4960(a)(1)? A–13: (a) General rule. For purposes of section 4960(a)(1), remuneration is paid for a taxable year if it is paid during the calendar year ending with or within the employer’s taxable year. Remuneration is treated as paid on the first date that the right to the remuneration is not subject to a substantial risk of forfeiture within the meaning of section 457(f)(3)(B) (regardless of whether the arrangement under which the amount is or will be paid is subject to section 457(f) or section 409A). An amount of remuneration is subject to a substantial risk of forfeiture if the right to the remuneration would be treated as subject to a substantial risk of forfeiture under Prop. Treas. Reg. § 1.457-12(e)(1). In general, this means that the amount is subject to a substantial risk of forfeiture only if entitlement to the amount is conditioned on the future performance of substantial services, or upon the occurrence of a condition that is related to a purpose of the remuneration if the possibility of forfeiture is substantial. See Prop. Treas. Reg. § 1.457-12(e)(1) for further guidance on the application of this standard.5 For purposes of this notice, remuneration that is no longer subject to a substantial risk of forfeiture is referred to as "vested" remuneration and the lapsing of a substantial risk of forfeiture is referred to as "vesting."

For best results - just add water...

Aren't you the one who claimed that when you ordered some batteries that they weren't included, so you had to order them again?

Fine - No more widgets. How about Instant Water?

Let me try. Scenario 1 - You want to buy a $10,000 widget. You earn $13,000 in wages, pay $3,000 in taxes, and with the remaining $10,000, you buy the widget. Net result - $3,000 paid in taxes and 1 widget owned. Scenario 2 - You want to buy a $10,000 widget. You borrow $10,000 from your 401(k) and put it in the bank. You earn $13,000 in wages, pay $3,000 in taxes, and with the remaining $10,000, you buy the widget. You then repay the $10,000 to the 401(k) from the bank. Net result - $3,000 paid in taxes and 1 widget owned. Scenario 3 - You want to buy a $10,000 widget. You borrow $10,000 from your 401(k) and buy the widget. You earn $13,000 in wages, pay $3,000 in taxes, and with the remaining $10,000, you repay the 401(k) loan. Net result - $3,000 paid in taxes and 1 widget owned. You don't attribute the taxes to the loan repayment, but to the wages earned.

The 3 year rule on voluntary terminations relate to termination and liquidation of the plan, which is not happening here. In any case, it would also prohibit implementing a new plan that would be aggregated with the old plan, which is again not the case here.

And for those of you doing your last minute calculations, please don't drink and derive.

Has there been any evidence that the value of the death benefit has been imputed to the employee? That's what the FSA would imply (usual disclaimers about not relying for precedent, only applicable to the case involved, etc). It sounds like the situation here is a bona fide loan and not an interest-free loan. Having to pay (capitalize) loan interest and also be taxed on the economic benefit sounds like paying twice for the same benefit.

I think more information is needed. Is the employer named a beneficiary of the policy? Otherwise, I'm not convinced you have a split-dollar arrangement. There doesn't seem to be any other interest in the policy by the employer. You're right that the forgiveness of debt leads to tax consequences; I'm thinking income taxes to the grantor plus treating the forgiven loan as a gift to the trust. I'm not quite sure what rollout means in this context, but if there is to be no tax on the forgiven loan, the only thing I can think of (and I'm not being facetious) is to repay the loan; the grantor makes a gift to the trust in the amount needed to repay the loan obligation, either with or without policy surrender.