gc@chimentowebb.com

I thought I would drill a little further into this question: extending a tax exempt organization's short term deferral. Is 457(f) enough or is 409A required? Carol's answer is correct that 409A won't apply, but there is an important distinction. Does the the extension period cover a period of employment (extending the STD for 409A purposes so that the payment is still an STD)? Or does it cover a period of "refraining from services," such as a post-retirement non-compete that converts the amount into 409A deferred compensation? That second situation, where the goal is to defer a payment with a non-compete, is a common problem. In that event it could be necessary to defer the payment for 5 years and precede the election with a 1 year 409A notice. I'm not alone in this thinking. There is a good article in the June 2017 Tax Advisor. See Example 17 which makes this important distinction. Until I read that, I thought 409A would apply only to a second extension, not the first, under the theory that it only becomes "deferred compensation" after the election, and not before. I could still lean that way, but it goes against this article.https://www.thetaxadviser.com/issues/2017/jun/deferred-compensation-proposed-sec-457f-regulations-sec-409a/

Carol, Good to hear from you. Sincere thanks, and I like that response. I'm dealing with an employment contract drafted by another firm that decided to push a short term deferral to the end of a 2 year severance arrangement with a non-compete. (no 26% supplement, but that could be added.) Although a period of enforceable non-competition would maintain STD treatment for the 457(f), it converts it into 409A deferred compensation and possibly the 409A deferral requirements. That unusual situation is what I am dealing with, and I'm inclined still to ignore 409A. (I haven't seen a discussion of this in the Bloomberg 409A handbook and may have missed it.)

It is maddening to have competing rules for 457(f) plans to postpone the taxable event. The 2016 proposed regs. require a 90 day notice, a minimum 2 year deferral period, and a benefit enhancement greater than 25%. However, because 457(f) plans are also subject to 409A, when applicable, it seems that a postponement election must also meet the 1 year advance notice/ 5 year minimum postponement requirements of 409A. If both statues apply, the rule in the 2016 proposd regs is meaningless except for the requirement to add the enhancement. In other words, complying solely with 90 day notice and 2 year postponement results in an automatic 409A violation. This makes no sense, but I have yet to see anyone in this field take the more logical position just to follow the postponement rule in the proposed 457(f) regs and to ignore the 1 year/5 year 409A procedures. Has anyone taken the aggressive position to ignore 409A procedures and just follow he 457(f) procedures? This would seem to be good faith, because I haven't seen anything from IRS that definitively requires that both postponement procedures be followed.

A SERP of a tax exempt org, provided for vested payment at age 65. Like most such SERPs it was structured as a 457(f) short term deferral. The SERP was later amended to allow the CEO/participant the right to select an earlier vested retirement date, provided it was (A) at least 12 months after the election, and (B) was forfeitable if he resigned prior to that new date. Allowing a participant this much discretion at first concerned me. However, it is not illegal for employers to accelerate short term deferrals. What is wrong with an employer delegating that power to a covered participant? These are just short term deferrals. If that does not trigger income tax at the date the power was given the participant, what would be the tax date? Would it be 12 months after the power was granted, i.e. the first day after the 12 months, or would it be the actual date the participant elected if later than 12 months? Hmmm. The person who drafted this amendment was in the HR Department and was insensitive to 457(f) but I wonder if this design actually works. My primary concerns are constructive receipt and/or the fact that IRS could consider vesting to be a charade after the first 12 months when the participant has this much control.

I'm not sure God could figure out the interest component to the 409A penalty. It's in addition to the 409A 20%, and the basic idea is to calculate the IRS penalty interest from the date when the amount was first vested. For a salary deferral, that is measured from the date of the deferral, not the date when the payment should have been made. The IRS owns most of this deferred payment after these penalties because they will have to be paid with after-tax dollars. Adding to the pain, most likely the agreement says the innocent (presumably innocent) employee is responsible for the penalties. When representing officers, I try to negotiate out of that clause whenever possible, and question its enforceability if the employee's role was passive. Bottom line: there is no formal fix for an employer who wants to do this correctly. That should be the starting point for any legal advice. I doubt any lawyer who cares about his license would go further on a public message board.

Of course, this is just for 409A, not taxes. My view: (i) If the disability definition meets the standard definition for total disability, and if the payment do not substitute for another benefit that would have been payable (i.e. for termination) this taxable uninsured benefit is not subject to 409A. (ii) Same reasoning applies to the uninsured death-only benefit. Not subject to 409A but taxable.

Thanks, Slider. That's the way the statute reads as well. I think the idea of "grandfathered" after-tax contributions comes from the "separate contract" rationale that is in 72(d)(8). It applies to pre-87 employee contribution contracts that are received "before" the annuity starting date. The IRS position in at least one PLR I saw is that as long as the election form to receive a lump sum is at the same time (or a second before the lection for the rest of the benefit) that all the employee contributions are received at once.

After-tax employee contributions in this DB plan stopped in 1969, well before the 1986 changes to IRC 72(d). The 1986 law eliminated the 3 year basis recovery rule for pensions starting after 1986 enactment. I have heard, but cannot find, a rule that employee contributions prior to 1986 will still have the benefit of the 3 year rule, even if the pension starts after 1986. Does anyone have that reference? Do these pre-1986 after-tax contributions still have the benefit of the 3 year basis recovery rule if the pension starts AFTER 1986?

Who is the named beneficiary of the IRA? The beneficiary form governs in matters like this. The fine print of the typical IRA beneficiary form probably makes that clear. Typically, IRAs are in custody of Banks or brokerages and there is no "plan administrator." The institutions won't pay based on a separate document. Are you sure this is an IRA?

Adopt an admin policy that charges accounts of terminated employees a processing fee equal to the lesser of the account balance or $5.00

Everyone. I think we are all agreed that for this 2024 error the 25% "safe harbor" in Appendix A applies, subject to the 45 day Notice. It's a weird result and Paul I identified the problem precisely. EPCRS authors mistakenly did not distinguish Roth Elective Deferrals from Elective Deferrals generally. If they had thought about it more, I think they would have required the QNEC to go to a Roth source. That can be remedied for those plans that allow in-plan Roth rollovers. No harm. On to the next issue. Great getting to know you all (virtually.)

Great input from WCC and Paul I. My conclusions so far: 1. Agreed. There is no distinction for correction purposes between Roth deferrals and pre-tax deferrals. As noted in .03 of Appendix B: "Designated Roth contributions. The examples in this Appendix B generally do not identify whether the plan offers designated Roth contributions. The results in the examples, including corrective contributions, would be the same whether or not the plan offered designated Roth contributions." 2. This means that a failure to implement a Roth elective deferal for a full year (that is caught timely within the SCP correction period) allows the employer to make a 25% QNEC, not 50% (and not 40% for after-tax failures). 3. A 2025 QNEC of 25% + earnings is pre-tax for 2025, subject to providing a 90 day notice. There is no official option to do this retroactively for 2024, which would be a mess anyway. 4. For any empoyer desire to do more, I agree that an extra bonus in 2025 (deferrable to Roth) is the simplest "extra." Conceptually. I do question why the after-tax default QNEC of 40% should not apply (if the IRS thought harder about). Were this in litigation, I also wonder whether 25% pretax would be adequate for Title I determination. For "safety" this employer will probably contribute 40%. Thank you, colleagues.

The NHCE elected to make a $5,000 Roth deferral. Pay was not reduced and no deferral (Roth or pre-tax) was made at all. The only EPCRS correction I see is for the employer to make a 40% pretax contribution, with earnings, to a QNEC. The employer and employee would like to do more. (1) contribute the 40%, with earnings, to an employee Roth account (2) and amend the 2024 W-2 to include the 40% with earnings. The IRS website (not EPCRS) allows retroactive characterization if a deferral had been made but incorrectly designated as non-Roth. https://www.irs.gov/retirement-plans/fixing-common-mistakes-correcting-a-roth-contribution-failure However, I don't see anything in EPCRS that would allow this for an employer QNEC. I'm inclined to tell the client to act in good faith but it would be nice to know if there is more creative guidance for this issue than making a 40% pre-tax QNEC.

Thanks, but you just reiterate my frustration. It would take only a few thousand dollars for DOL to upgrade its calculator for the purpose of complying with its mandate. God knows how much time they spent for the wordy semi-regulation that does everything but give a simple table, which the IRS has done for 401(a)(9) withdrawals. The DOL continues to make things hard for employers, who just need simple rules without professionals milking them by the hour.

I'm a lawyer who is simply annoyed that clients need to consult an actuary to get a very simple set of factors to calculate the ERISA 105 annuities from lump sums. The DOL has a great calculator, but has not gotten off its butt to repopulate it each year with up to date conversion factors. (They created this calculator for pre-2019 law when they wanted participants to get better information, not the unhelpful assumptions they now require for ERISA 105 that assumes that accounts don't grow and that participants are each age 67 and married to another 67 year old of the same sex.) Unisex fine. I'm just trying to insert a little humor into this expensive government mandate that requires plans to hire an actuary for a very simple age 67 assumption, and is audaious enough to say that a better calculation with real ages and a real annuity quote is allowed, but does not comply.

I am embarrassed that I don't know how to turn the 417(e)(3)(B) factor that is published each year into a formula that would convert an account value into single life and J&S 100% survivor annuity forms at age 67 (or older age if the person is older than age 67). I've got clients who self administer their DC plans and they need to come up with the hypothetical annuities each year (with December 1 assumptions and December 31 account values) for the required SECURE ACT ERISA 105 disclosure. Is there a formula to convert lump sums into the annuity equivalents with the 417(e)(3)(B) assumptions that DOL requires? Even better, is there an easy conversion table like we see with 401(a)(9)? For example, Notice 2023-73 says that at age 67 there is a factor of 0.00920. How do you turn a lump sum into the single life and 100% jt and survivor annuity equivalents? There is a great calculator on the DOL web site, but it generates annuity equivalents that cannot possibly satisfy the Department's 105 guidance. It grossly understates annuity equivalents and must still be using the outdated 10 year CMT rate that was much lower in 2019. Actuarial firms I contacted are charging outrageous amounts. Is there some way to do this without hiring an actuary? Frankly, I'd like to learn. Converting a lump sum into annuities for a fixed term is easy. It's genrating a SECURE Act mortality table for age 67 and later years that has me stumped.

The Answer is B, one year before the time of scheduled payment, unless Plan language is unduly restrictive. Were that not the case it would not be possible for separated employees to make later postponement elections, and I see that all the time with installment elections when each payment is deemed a separate payment. I am assuming that the initial election was for a separation from service payment or for the first to occur of the two, fixed date or separation. That plan language allowed for two different payment events, separation from service OR fixed date. Check the election he made. Which was it? Then double check the plan's postponement language. 0ne year before payment date is all you need. (Not legal advice, etc.,etc.)

If it's a disregarded entity that means it is owned 100% by someone else, which I assume is a corporation. There is no partnership, because there is only one owner. If there were more owners it would not be a disregarded entity. Your corporation is selling the assets of the LLC, correct? (No rational buyer purchases equity interests and potential claims.) Just take the position that the employees have terminated employment due to the asset sale and pay them as terminated employees if the agreement provides for that. You could also treat them as employees affected by a change in control and terminate only with respect to them but I like the employment termination rationale better, and just vote to vest them if employment termination is not a vesting event. For the deficient language in the "deferred comp." agreement, I assume you will maintain responsibility under the sales agreement, but I don't know of the IRS auditing the fine print in agreements. It's usually just eager beaver attorneys and accountants in a transaction. Not legal advice, of course. Do your own due diligence, etc.

Got an answer to the question below from my partner who does more submissions than I these days. Apparently you type in "determination" instead of Form 5300 on pay.gov. in order to get the 5300 form. Unbelievable. Every other form, including 5307, you are asked to fill in the number of the form or the Agency. Type in 5300 and you get a blank. Type in the IRS and you get other forms, like the 5307, but not the 5300. ___________________________________________ I am going to submit an individually designed 403(b) plan under the new procedure that allows for this. The IRS website says to use pay.gov. To my surprise, pay.gov only has a 5307 available. It seems that the 5300 has not been loaded into pay.gov. but that is a form for qualified plans, too. Any ideas?

Peter, I just thanked David Schultz for his citation. Let me also thank you for your well-thought contribution. I'm comfortable on the facts for this client that the SPD was sufficiently silent about "adjustments," which would not be occurring if this employer had not decided to merge with another larger entity. The adjustment will actually favor employees who are not HCEs. Good collaboration, and I hope I can add something should you have an issue with your clients.

Thanks, David, for that citation Rev. Rul. 2002-45.

It's a common situation. The employer is merging into another and is required to terminate the Plan. The insurance company requires a "market adustment" for its "stable value" fund. The Plan is broad-based and the employer does not want its employees, who thought the money was safe, to lose money because of this "market adjustment." Is there any guidance that would allow for this, without making this a prohibited transaction or a contribution that needs to be counted for 415 or 401(a)(4) concerns?

Bill, Obviously LPTEs can come in w/o violating the safe harbor. The problem is that many excluded class Per Diems work schedules that are not LPTE. For a hospital with a safe harbor and Per Diems, they can't say that Per Diem LPTEs can defer but that full-time LPTEs cannot defer. The only solution I can think of is to have a deferral-only Plan for the Excluded Class.

Interns can be a legitimate class that would be excludible, subject to 410 participation rules, IMO. Be careful about your conservative approach to allow them in for deferrals only. If your plan is a safe harbor, you will blow the safe harbor if anyone in the plan, including your interns, does not get the safe harbor. It's a terrible quirk of the safe harbor regulations that does not allow you break a 401(k) plan into excludible classifications.

I decided not to be lazy because answers from forum so far are not on point. For edification, it's PBGC 93-3. No 30% asset sale exception if that sale occurs after a mass withdrawal.