gc@chimentowebb.com

A school with 300 FTEs hires 90 summer counsellors each year. The Plan for the 300 FTEs does not require a waiting period, or minimum hours, or last day of the year employment. Fully vested contributions are made with each payroll period. Counsellors are excluded as a job class. They work no more than 400 hours a year and are terminated at the end of each season. Am I correct the counsellors are excludible employees simply because they are terminated in the year with less than 500 hours? I don't believe it matters that the Plan for the FTEs does not require hours or last day of the year employment. Thoughts?

On your facts - claiming deductions without making contributions - the correct answer is he should amend returns or he is just playing audit lottery. Hard to believe an accountant prepared returns claiming deductions without seeing actual conributions.

Thanks, Belgarth, I fully agree and appreciate your response. This annualized approach -expected hours for the year divide by 52- is even more clear in the LRMs, but it can lead to inadvertent problems. For example, what if a school allows a 40/hr per week summer temp (not expected to reach 1,000 hours) to defer, thinking that's required because of the 40 hour weekly schedule? Universal Availability cannot be applied selectively, so the school now must allow every employee, even those with schedules that are clearly below 20 hours per week, to defer. And if it does not, it has unintentionally violated Universal Availability. Another question that stems from this interpretation. What if an employer wants a lower threshholf than 20 hours? How is that administered? Is the 1,000 hours reduced on a pro rata basis? Finally, the IRS website describing Universal Availability certainly doesn't help. That final sentence states: "A plan that wants to apply the statutory exclusion for part-time employment must determine eligibility for the 403(b) elective deferrals based on whether the employee is reasonably expected to normally work less than 20 hours per week and has actually never worked more than 1,000 hours in the applicable 12-month period." I honestly think many at IRS don't understand Universal Availability is based solely on hours in the year divided by 52.

For Universal Eligibility, is regularly scheduled for 20 hours per week determined week by week, or is it an annualized test? In other words, if a 40 hour per week temp is hired for a one month engagement (less than 1,000 hours expectation) can they be excluded as being regularly scheduled for less than 20 hours per week, even though they will be 40 hours per week for one month? The 1,000 hour test in the 2007 regulations, the LRM definition, and Notice 2018-95 all state that the 20 hour test is really based on expectations for a full year, rather than a week by week schedule. This makes sense in a way. What if you hired a 40 hour per week employee for just a one week assignment ? Still, I see many different "interpretations" of UniVersal Availability on websites, and they all dance around (or are unaware) of this issue. I get around it for most clients by making 403(b) available for all, but this interesting issue came up.

Agreed. Comp is unlimited for SIMPLE matches, but if you match 100% of the deferral limit, your match will exceed 3% of compensation except for very high earners. In no event may a match exceed 3% of compensation, and that is the problem here. Anecdotally, it was a SUB-S company and the owner's accountant wanted to save Medicare taxes, so he made the compensation much less than the distributive share of earnings, and got his client into a big mess.

Since 2007 the company has matched the owner's deferrals in a SIMPLE IRA, violating the 3% compensation cap on matches. With earnings, the excess employer contributions cumulate to $300,000. EPCRS states that the excess should be returned to the employer and should not be deducted. (The employee, the 100% shareholder, will then get a 1099-R for the $300,000 showing zero as taxable.) The employer, a sub-S, will report the $300,000 refund as income in 2022, the year of receipt, and it will be taxed to the 100% shareholder of the Sub-S as ordinary income in 2022. All good, so far, but what does it mean in EPCRS that the employer shall take no deduction? Does that mean that corporate returns that claimed a deduction for the excess employer contributions since2007 should be amended? That's impossible. It seems too good to be true that the excess just gets returned to the Sub-S with taxes due in 2022 on the $300,000 refund and no other penalty or sanction. Another possibility, when returns cannot be amended to disallow deductions for 15 years of excess contributions, may be to leave the excess employer contributions and associated earnings in the SIMPLE IRA and to pay the 10% sanction in EPCRS. This is listed as an alternate correction, but may be the only available one in these circumstances. I may ask for a no-names conference with IRS under the new procedures. Any experience with excess contributions to a SIMPLE going back this far? Any thoughts?

There won't be a problem. This is pretty common for institutions to file a barebones 1041 which contains only the trust’s name, address, and tax identification number. They will attach a separate grantor tax information letter to the return. This is easier for them than filing 1099s when there are multiple sources of income.

Good question. My quick take from memory: As long as this is the employer's choice, you are OK. However, if the participant made the choice (or had a lot of input, which is facts and circumstances), you should comply with the 1 year/5 year rule to postpone a short term deferral from one calendar year to another. In the case of accelerations of short term deferrals, that happens all the time and should be OK.

Fun question. I don't see a non-compliant deferral election or a 409A failure. He gets paid with short term deferrals if he continues employment. If he quits he gets paid under a deferred schedule, presumably with no options to accelerate or postpone those payments.

That's a rare employer who will pay before getting an effective release. At some point, if you want the release to be ADA-compliant, you may face an overlap issue for payments falling within the 28 day period (21 days to consider and 7 to rescind). If you are willing to continue paying them during that period, so that payment is not altered and forfeiture occurs only for payments due more than 28 days following presentation of the release, I don't see a 409A problem. The problem would be a decision to suspend payments. Of course, if a release requirement is being added after the fact for benefits that have already accrued, you may have some Title I issues with the employee. And, if you are trying to fix an existing document, you will need to review the dreaded Notices 2010-6 and 2010-80 for documentary failures. Good luck.

I agree, Former Esq. Thanks. There will not be a substitution for any amount for which the participant has a legal right, because that would then be a "relinquishment" of rights by a participant, and a prohibited substitution. Let's complicate this a bit further. In addition to 20% of base salary, the SERP presently provides for a 20% contribution of any bonus. In this case, bonuses ae accrued and paid in the following year by March 15. So, if the company were to freeze the SERP on June 30, 2021 and to discontinue future 20% base salary contributions, what happens with the bonus paid on March 15, 2022 with respect to 2021 services? Does the employer have to contribute a pro-rata portion of the 20% (i.e., 10% for a June 30, 2021 freeze) or the full 20% or nothing at all? For an service provider elective deferral, the full 20% would be required, but for a service recipient contribution, I'm thinking 10% (not 20%) would be required, even though the bonus for 2021 services is not known on June 30, 2021. I wish the answer could be zero.

Employer has committed to a 20% contribution to a defined contribution SERP. The time and mode of payment are fixed in the document. The employer wishes to freeze contributions mid-year, and the plan document permits this. The reason is that the employer intends to substitute 409A-exempt stock options and bounuses for the amounts it would have contributed to the SERP. I don't see a problem with this, but would appreciate input: 1. Substitution is not really the issue. The accrued amounts will be paid as scheduled and the employees are not relinquishing rights. As stated, the plan allows for a freeze with advance notice. 2. Changing a deferral amount mid year should also not be a problem. Although mid-year changes are prohibited for elective deferrals, absent hardship, this does not seem to apply to plans funded solely with contributions by the service recipient. Thoughts?

I agree with Luke's reference. There is no failure for missing the 10 day window in the plan. The employee could complain, but for 409A purposes you are timely if paid by March 15, 2020, provided the employee did not select the payment year.

You've simply converted a short term deferral into a 409A arrangement (payable for a permitted reason). I don't see an issue except that after you do this you can't change the timing without complying with the 409A rules. For example, if you later decided it was too long to be committed to this and wanted to cash him out, you wouldn't have that flexibility.

How would you administer the 1 year/5 year elective postponement rule for an employee who is a specified employee? Example: Jill is a specified employee with a payment due at separation. She intends to retire in 7 months, but the payment must be delayed for 6 months. Is the 1 year deadline to make the postponement election measured to the date of separation when the payment would have been made, if not for the 6 month delay? If so, it is too late for Jill to postpone? Or is the 1 year election deadline measured to the date it will actually be paid, 13 months from now in this example, which would make this a timely election for Jill? And, just to be consistent, from which date - termination date when it would have been paid or 6 month delay date when it is paid - does the 5 year postponement clock run against? I'm thinking that the 1 year and the 5 year periods are each measured against the actual payment date, taking the 6 month delay into account as a plan provision. In other words, Jill in this example could make a timely election, even though only 7 months before the date when the payment would have been made were it not for the 6 month delay. The 5 year postponement period would also be measured from that actual payment date. Regards!

I don't see a 409A problem with different payout amounts for different events, and even for the same event (separation from service). You see this in SERPs sometime, where one amount is paid for voluntary resignation and a higher amount is paid for termination without cause.

This is a good point. Severance paid prior to termination is includible for 415. I've never seen this for top executives, who we are concerned about for this 409A topic, but it is a practice when people in lower ranks are terminated. So let's qualify this. For in-service severance, an employer using the W-2 safe harbor or the witholding safe harbor for the Specified Employee List would include it. For Employers using the default method for populating a 409A list, I think it would be disregarded because this would probably be considered a special timing option which gets disregarded for the default method. In additon, excluding the in-service severance still complies with 415, and for the specified employee list anything that complies with 415 is OK. The advantage of disregarding it, even though permitted, is the terminated employee, as Luke points out, is not really a concern. For the terminated employee with disregarded in-service severance, the 6 month period will probably have lapsed by the start of the next administrative period. All that happens by disregarding the in-service severance is to bring #51 into the top 50.

Dear RTM and Luke. First the easy answer for RTM. Click the link for IRS examinations in my earlier post. https://www.irs.gov/irm/part4/irm_04-072-007#idm140256657577984  scroll to the bottom and you will see that Agents examining plans for 415 violations are supposed to exclude severance, even with plans which use the W-2 safe harbor for 415. For 409A lists of Specified Employees the regulations do not say you can use W-2 with only an add-back for qualified pre-tax items. They say you can use the W-2 safe harbor in 415 (or other permitted 415 methods). None of these 415 methods allow severance to be included. This was a new wrinkle added to 415 regulations in April, 2007. Next for Luke. I fully agree the problem is not with the terminated employee on the List who is mistakenly considered a Specified Employee because of a big severance payment. Chances are that the 6 month rule will not apply to him unless his 6 month post-termination period extends into the next 12 month Administrative Period. The problem is with the active employee who is 51st in rank, and never gets on the List because of the mistake in counting the terminated employee's severance as part of his compensation. That 51st employee should have been on the List and the 6 month rule should apply to him in the following Administrative Period. Good to discuss. I really don't think the IRS will punish anyone who has been using W-2s with severance included. They probably aren't even aware of this technical point.

RTM, no question about severance. It is in a W-2, but not in the W-2 safe harbor for 415 (or 409A). Here is how I read this. The authors of the final 409A Specified Employee regs provided that in addition to the default 1.415(c)-(2)(a) definition (with adjustments) that any other 415 definition would work, including 415 safe harbors. One of those 415 safe harbor rules is W-2, with pre-tax add backs and exclusion of post-employment severance. IRS Exam Guidelines for 415(c) are clear about severance exclusion, even in its W-2 safe harbor. https://www.irs.gov/irm/part4/irm_04-072-007#idm140256657577984 This exclusion of severance for 415 happened in April, 2007, when 415 regulations were restated. Prior to that, severance was allowable for 415. I doubt very much that the authors of the 409A regs in that same 2007 timeframe were aware of the change in 415, or would have cared much had they known that severance was no longer 415 compensation. My conclusion is that anyone using a W-2 definition for a Specified Employee List, who accordingly includes severance, is incorrect. Severance is not acceptable compensation under 415. However, because of the historical coincidence that severance could be used for 415 until April, 2007, when IRS was also writing the 409A regulations, I believe IRS would probably give a pass to those who are using W-2s with severance to develop their Specified Employee lists.

Hi Luke. I have the correct reg. cite for this 409A default definition of compensation. It's 1.415(c)-2(a). More importantly, the point I am making is that severance needs to be excluded when determining specified employees, and not just for the default definition of compensation. Excluding severance is not an elective timing rule. Excluding severance is a requirement for any definition of compensation in IRC 415. This is not just an issue for those using the default definition. It also applies to those using the W-2 safe harbor in the 415 regulations, or any permitted definition. Think about this. Virtually every 409A treatise says that using W-2 income with addbacks for pre-tax deferrals is the easy way to determine compensation for specified employees. Not one of them points out that a W-2 includes severance (and post-termination non-qualified payments that are triggered by separation, another item that can never be used for 415 purposes). I'm thinking that many people are preparing lists of specified employees and not realizing that severance should not be part of the compensation. I'm puzzled this never appears in any of the 409A Treatises or articles.

The 409A default rule for determining specified employee compensation uses 1.415(c)-(2)(a) compensation, items in 1.415(c)-(2)(b) and excluding those in 1.415(c)-(2)(c). The default definition says the special timing rules of 1.415(c)-(2)(e) are not to be used. The special timing rules of 1.415(c)-(2)(e) are of two types: one type is elective, i.e. post termination regular compensation can be included if paid within 2 &1/2 months. That's clearly excluded for the default. The other type is mandatory (exclusion of severance and post-term NQ payouts triggered by termination). Issue: do severance and NQ payouts triggered by termination count as compensation under the default rule of 1.415(c)-(2)(a) for measuring specified employee compensation. Example: Administrative officer terminates in January of a calendar testing year with small compensation that would not put him in the top 50. If large severance is included , he would be in the top 50 (and the result is that an administrative officer ranked #51 by compensation does not get on the list).

C.B.Z, That is a very creative solution for those age 50 or more. Kudos Editorially, for a company that is not rolling in the green stuff, it might be better for Keys to skip the deferrals and pay taxes at the lower current tax rates. Then invest in capital appreciation instruments and pay capital gains taxes in the future. Also, maybe just get rid of the 401(k) plan. The government considers an employer to be a potential public enemy when it sponsors a plan. Steer employees to IRAs. Give bonuses to the ones who excel, and focus on the business.

Not sure I see a 409A issue. There is no legal right to a bonus on your facts until the Board makes its decision and then pays the amount. There is no deferral in a situation like this.

It’s now 2018, and if any of you are around, here’s a different version of the same question. A 16 year old dependent daughter has a child out of wedlock. Still an infant. Under state law (Massachusetts) dependent grandchildren must be covered. The employer intends to switch to self insurance and to discontinue dependent grandchildren coverage, even in immediate post-natal stage. I do not see any COBRA rights for or on behalf of the dependent grandchild, who now must get healthcare elsewhere. This cutback in coverage also seems to be legal, subject to appropriate advance ERISA Notification. Anyone have a dofferent opinion?

if the period to consider the release did not overlap two calendar years, you do not have a timing concern under 409A. Just take the position that you do not need the magic (silly) language for this arrangement.