gc@chimentowebb.com

This is a tough and frequent problem. Technically, the plan fails and 457(f) applies to the "plan." I'd like to think this just means the employee's "plan" -the 409A approach to defining "plan" - and not the "plan" of everyone. Alternatives? None of them happy. - Filing a retroactive W-2 is probably the "safest." Then give the employee some sort of taxable gross-up. - Or. take the position that employee elected a timely postponement within the plan terms and file a current W-2. That is probably the most practical, assuming the plan has permissive postponement terms. The danger of that second approach is, technically, conversion of the "plan" to a 457(f) if the IRS disagrees that there has been a timely election. In that event, 409A penalties might even apply because there was not a timely election to defer a 457(f) short term deferral, and the "plan" has lost its 457(b) exemption from 409A. This entire area of the law is way too complicated.

You could look at it this way. Your plan currently has separation from service as a payment event, and it also has a vesting condition if separation occurs prior to normal retirement age. You are not adding a new payment event. Instead, you are now just forgiving a vesting condition by allowing for payment if separation before normal retirement date is involuntary. There is a specific example in § 1.409A-3(j)(1) which deals with acceleration of a separation from service vesting requirement from 10 years to 5 years. Even though this results in potentially faster payment, it is not an acceleration. Regards.

Isn't this a short term deferral payable promptly after vesting date?

I drafted this question and the suggested response. Frankly, the regulation is very clear: one post-separation mode of payment per plan, not per deferral. However, after speaking with various TPAs, I believe there are many plans which have allowed the more permissive approach. Realistically, this was just a minor drafting gaff in that horribly complex regulation. There is nothing in the statute to limit plans to one post-separation mode of payment. In future, I wouldn't be surprised to see a written clarification more official than the ABA colloquy. In the meantime, I intend to rely on this more realistic approach, and welcome it.

It gets even trickier, because the 20% (or higher percentage if you set the arrangement up that way) is based on a rolling 36 month average. I went back and forth with people at the National Office on this. It makes no sense not to be looking back to the last 36 months of full-time service, but the response was to look at the most recent 36 months, because the regulation is written that way. As a practical matter, if the compensation is at the necessary rate in your arrangement for a separation from service, and if the employee is not required to be on premises, and if the employee is not eligible for other benefits, you should treat this as a separation from service. If you do not, there is a better chance that the IRS would consider this to be an abusive deferral technique.

I would view these as short term deferrals. In the context of 3121(v), the Office of General Counsel was clear that renewal commissions are non-vested deferred compensation until payment is made, even when there is actuarial certainty of payment. See CCA 200813042. If the IRS took a different approach under 409A (and held that renewal rights were vested at termination, rather than at later payment dates), it would essentially be conceding that no FICA would be owed with each renewal payment due to 3121(v).

Query: Because the severance right is available upon a voluntary termination of employment, it will vest once the physician hits 3 years of employment. So, due to the corporation's nonprofit status, won't the deferred compensation be taxable at that point in time? And, if so, what is the amount that's taxable, as the post-termination collections won't be known at such time? Thoughts? And thanks. Even though the amount is payable for voluntary separations from service, you might be able to take the position that this is a severance plan under 457(e)(11) which is exempt from 457(f). Notice 2007-62 promises in the future to come to a different result when IRS ultimately defines what is a bona fide severance plan for 457(e)(11). However, until it does that, this is one of those grey area where you certainly won't be the only one taking the position. Consult an attorney, of course, and do not rely on this e-mail posting.

My understanding is that the Plan termination rule applies to all plans of the same type in the controlled group. If that were not the case, it would be very easy to circumvent the anti-acceleration rule.

I received a helpful (informal) answer from IRS on this one. An election prior to the start of the 30 day window is permitted, and IRS did not intend to limit elections just to the 30 day period starting on the first day of participation. This was the sensible answer I hoped for. It's the only way in which pay earned on the first day of a participation period could be deferred. G

I think I can help you out on this. The question is whether you can defer taxation of restricted stock. The issue is pretty much the same as you face with 457(f). Although 457(f) is not property, the tax principles for Section 83 are generally used to defer taxation on 457(f) deferred compensation. Key principle for section 457(f) and section 83: Once you are vested, you are taxed.

Question - does fact that bonus formula is based on past service meant that a deferral election is required upon initial eligibility, e.g., completion of 10 years of service with satisfactory performance reviews? Or does true eligibility not arise until the reason for termination is clear and it is not for unsatisfactory performance, violation of policy? And does fact that termination must meet certain criteria preserve SROF until that time? Any comments are appreciated. Answer: The way I look at your program, it is just a short term deferral paid no later than March 15 following the first vesting year. (No one is vested in your plan throughout their career because voluntary resignation or termination for cause prevents payment of the bonus.) The fact that the company looks to past service for eligibility and bonus computation is irrelevant. No deferral elections are necesssary. Now, if you had top hat people in the program (or if you are convinced you do not have ERISA pension benefit or state law issues by offering deferral choices to the average rank and file) and if you wanted them to have a deferral election to get paid some years after termination of employment, you could either do a one year / five year election which is permitted for short term deferrals, or, assuming the person is not in another elective deferral plan already, you could offer deferral elections within 30 days of commencing participation, subject to proration in the first year. However, I think you just want to pay after separation, so I don't see the need for a participant election. G

<<I disagree. While it would be unusual for a plan with Section 409A concerns to be an ERISA plan, it is possible. 409A is just a law addressing the taxation of nonqualified deferred compensation; a service provider who is not among a select group of management or highly compensated employees may easily be subject to 409A's penalties.>> You have set up a bit of a straw man. I didn't suggest that 409A penalties are limited to top hat people. The question I responded to was whether company officers administering a 409A plan are ERISA fiduciaries. And I observed that most 409A plans are technically exempt from ERISA fiduciary rules because of the top-hat exemption. This might seem a little technical, so apologies in advance: 1. if an unfunded deferred compensation plan is not a "pension benefit" plan, it's not under ERISA. It can cover non top-hat people. Officers are clearly not ERISA fiduciaries in that case. You are correct that 409A applies to all employees. Bonus plans that pay after the applicable 2 & 1/2 month S.T. deferral deadline might be in this category. 2. if it is a typical unfunded "top hat" pension benefit plan (i.e. deferrals will be paid after separation from service), it is under ERISA, subject to Part 5 of Title I and exempt from most of ERISA, including Part 4 fiduciary requirements. I might add that 409A was focused on ERISA pension benefit top-hat plans (i.e. the typical SERP or elective deferred comp. program). They are not a rare exception, as you suggest. If maintained according to top-hat rules, administering officers are not ERISA fiduciaries but can still be indemnified 3. If an unfunded pension benefit plan improperly covers non top-hat people, ERISA requires it to be funded. If it's funded properly, 402(b) is the operative taxing statute. If it's not funded, and if non top-hats are covered (the situation you suggested), there are serious ERISA violations, because full reporting, trust and vesting requirements are applicable. If there is a designated fiduciary for that type of non-complying plan, he or she needs to address the ERISA issues. Getting back to the original question, corporate indemnification is always permissible, subject to bylaws and applicable state statutes, which generally prohibit indemnification for intentional malfeasance. Whether the person is an ERISA fiduciary depends on whether the plan is a "pension benefit plan" and whether it is a non-complying top-hat plan -- because of including average people --that should then be covered by Part 4 (fiduciary rules) of ERISA. I hope that helps, and I apologize for the complexity. GC

<<Under 409A, would a plan admministrator be considered a fiduciary, as would be the case under ERISA?Can a plan fiduciary be indemnified by the sponsoring company for the plan administrator's errors in administering the nonqualified plan?>> 409A plans are "top-hat" plans. Accordingly, the fiduciary rules of ERISA do not apply. I don't see a problem in indemnifying employees who administer 409A plans, however, subject to limitations in the corporate bylaws.

<<So in my opinion, the regulations do not require establishment of an ERISA plan (though it is very easy to end up establishing one "by accident"). But I understand that is up for debate, and am interested in alternate views that consider this an ERISA plan.>> Like you, I don't care to have my clients be a test case. But the 125 requirement has to be viewed in the context of the entire statute. I don't believe it would pass muster in a preemption attack. Here's what an employer is required to do: (1) provide a cafeteria mechanism and administer it (2) obtain HIRD Forms annually from those who decline 125 coverage (3) report to the State whether they sponsor a 125 plan and provide other plan data. And, (4) if a 125 plan is not sponsored, the employer is essentially required to self-insure medical costs, because of the potential assesment through the state's free care pool if employees use it. That's just too many mandates for the entire thing not to be preempted. Considering how few employees actually use the MA 125 arrangements, I wish the legislature would remove that mandate from the statute. Employers who sponsor health insurance have enough to do, and there are few part-timers for whom this 125 tax break is meaningful. In fact, most of them would be better off to pay employment taxes and build up SS credit, and it's disingenuous for the State to promote a progam that lowers social security pensions for part-timers. GC

[i'm not sure why you are concluding that QSLOB's are not an alternative.] There are problems creating QSLOB's in the healthcare industry. For example, even when broadly based, large affiliated service groups can't be separated into QSLOB's. Also, if you don't have a mix which satisfies a QSLOB population safe harbor, you have to separate into approved industries, and medical services can't be separated.

[i stand corrected: If you're willing to go through the QSLOB rigamarole (sp?) you can indeed run 5 tests in one plan.] In fairness to you, my question did not involve QSLOB's. It was a controlled group with separate companies where QSLOB status would not have been possible for the employers (i.e. 50 employee test, healthcare, etc). For convenience and to limit audit expense, the 401(m) plan would have allowed all companies to participate, but only some of the companies would provide a match. (This was to compensate for the fact that their employees don't participate in a DB plan that the group sponsors.) No discrimination was intended. Each company group within the 401(m) plan would have passed 410 using the ABP test taking the match into account. However, the requirement to pass the ACP test on a plan wide basis, rather than on the basis of separate employer groups within the 401(m) plan that pass 410, makes this impossible. It's unfortunate to have to go through the expense of separate 401(m) plans just to be able to do separate ACP tests, but that seems to be the result. I was hoping there was some alternative. GC

[quote} Auditor is threatening that audit will be closed unagreed if plan sponsor does not sign Form 56. Is this normal? They need to get Form 56 http://www.irs.gov/pub/irs-pdf/f56.pdf signed so that they can issue summons for information from third parties. Here's a key quote from the IRS Manual: "With the enactment of RRA 98, the notice procedures now apply to almost all third-party summonses. Therefore, the Service must accurately distinguish third-party summonses from those served on a taxpayer. In most situations, this distinction is obvious. However, it is less obvious in at least two circumstances: those involving married couples who file joint returns and those involving employees or corporate officers who are summoned in that capacity." http://www.irs.gov/irm/part25/ch05s06.html It does sound like you have a real audit under your hands. George

Last sentence should have read: "It means they can stay with the 5 year rule, pay transfers in a lump sum, and beneficiaries of their deceased employees can still get favorable treament without the need for a special PLAN distribution in the year following death." The distribution would simply come from the IRA no later than 12/31 of the year following death. George

<<As for 2008, I understand the logic but I'm not sure the IRS pronouncements would allow for the first LE RMD to come out of the IRA rather than the QRP. The reason is that if no LE RMD for 2008 comes out of the QRP, then it might be that the RMD is the 5 year one and you'd not have the option of LE RMDs out of the IRA. It shouldn't matter whether the RMD for a year comes out of the QRP or the rollover IRA, but that's how I read Notice 2007-7. >> John, that's how I read 2007-7 also. However, http://www.irs.gov/pub/irs-tege/se_021307.pdf is a 2/13/2007 "clarification" that allows participants in plans which only allow for the 5 year rule to elect the annual installment method for distributions from the IRA, provided the election is made no later than the year following death. The Newsletter does not expressly say it, but I have to assume that the IRS means in that case (where the plan only provides for the 5 year rule) that the beneficiary's MRD for the year after death could be paid from the IRA. How else could a particpant in this circumstance make an election? It's not a Plan qualification issue, because the plan is permitted to transfer a lump sum in the year following death. It really boils down to whether the beneficiary can elect the annual installment method and take the first withdrawal from the IRA, rather than hoping that the plan will change payment procedures to accomodate the beneficiary's tax planning. I think the IRS is agreeing to that (payment from the IRA). It's good news for employers. It means they can stay with the 5 year rule, pay transfers in a lump sum, and beneficiaries of their deceased employees can still get favorable treament without the need for a special distribution in the year following death. What do you think? George Chimento

[Your thoughts would be appreciated.] I just re-read the preamble to the final regs. An employer which is part of a controlled group and includes a hospital or educational entity may elect to aggregate service for the special 15 year rule. Here's the preamble cite: "For a section 501©(3) organization that makes contributions to a section 403(b) plan, these rules (controlled group) would be generally relevant for purposes of the nondiscrimination requirements, as well as for the section 415 contribution limitations, the special section 403(b) catchup contributions, and the section 401(a)(9) minimum distribution rules." George

[several medical practices have been set up that are affiliated with a local university. Some have 403(b) plans and are wondering if they can be considered a qualified employer (educational organization, hospital, etc.) for purposes of using the "15 year rule." Your thoughts would be appreciated.] I have a similar issue with a controlled hospital organization. If it were church-controlled, the answer is easy. All entities are covered and treated as one. By implication, that means each entity in a non-church group still has to be tested separately for "qualified organization" status under the 15 year rule. However, there might be another way around this. I was surprised to see how broad the definition of "health and welfare service agency" is in the final regulation. It seems to cover any "organization" whose primary purpose is to provide medical care ("such as a hospice"). There is no limiter that this be a public entity. So a medical practice, a sub-acute facility, or other controlled entities related to the primary mission of a hospital or school could be considered a "qualified organization" for the 15 year rule. Any comments?

Because this is a complicated area for people who don't practice in it every day, I am posting a good summary chart from TIAA-CREF. http://www.tiaa-cref.org/administrators/re...ison/index.html The chart is very clear that for a 457(b) non-governmental plan: 1. 415 is not applicable. 2. Total contribution (employer and employee) is limited to $15,500, with a limited catch-up in final 3 years. 3. Employer contributions are not measured for limitation purposes until vested, like the "old" 403(b) exclusion allowance. In other words, investment earnings on non-vested employer contributions will also be considered as employer contributions when they vest, which can be a problem. Here's a link to an old article I wrote which catches some of the basics. http://theworkplace.biz/457_article.html Regards, George

I believe it can be any amount. The 402(g) limit cashout provision is meant to give an employer discretion to overide an election. If the plan provides that a cashout must occur, there is no limit from what I can see. Let me take it another step further. Some of my pre-409A plans provided that installments, regardless of election, must always equal at least 1/2 of the 415 DB limit as in effect on January 1. It was a way to assure participants (and plan sponsors) that the distributions would not be painfully small, and that they would also provide a reasonable income supplement. This is certainly a definite and pre-determined schedule. Whether it works under the regulations is a bit unclear to me. Getting an answer before this ridiculous semi-compliance date of 12/31/07 is problematic. George

I'm posting this non-securities law question here because it is the only forum that seems to address multiple employer plans. If a contributing employer ("Contributor") withdraws participation in a multiple employer 401(k) plan, because of its merger into an unrelated company ("Survivor"), can distributions be paid to employees of Contributor? Assume the employees now work for Survivor and participate in its defined contribution plan. Has there been a severance from employment due to the merger ? The ownership of Contributor has changed and Survivor is not a sponsor of the multiple employer plan. Maybe Reg. 1.401(k)-1(d)(2) applies. Or is the theory that the multiple employer plan has "terminated" with respect to Contributor, so that 401(k)(10) lump sum distributions are permissible? Or is it impossible to distribute to Contributor's employees without violating the 401(k)(2)(B) distribution restrictions ? Thanks.

Thanks, Mike I just wanted to have a sanity check on this. George