SycamoreFan

Anyone have any experience with the Form 926 reporting for a qualified plan's investment in an offshore hedge fund? A client's legal team is certain that a Form 926 should be filed for such investment, but since the plan does not file a tax return is uncertain of the mechanics of filing it.

A client has a 401(k) plan that matches dollar-for-dollar up to 4% of Compensation. Compensation is defined to include bonuses. Participant A elected to defer 4% of Compensation into the Plan. Participant A was paid a bonus of $25,000, and therefore, $1,000 was electively deferred into the Plan and a $1,000 match was also contributed into the Plan. Two weeks later payroll discovers that Participant A should have received a $10,000 bonus (which would have resulted in only $400 being electively deferred into the Plan and a $400 match also being contributed into the Plan). So, due to the erroneously large bonus, an excess $600 of deferrals and $600 of match were contributed to the Plan account. The client would like to know there options for fixing this situation. If no applicable IRS limits were breached, it doesn't seem to me that the result is a plan qualification failure that would require correction under EPCRS, for example, as an "Excess Amount." Could the client just take the excess $600 of deferrals out of the Plan and pay to the participant (and then require full repayment from the Participant of the excess bonus ($15,00) and return the excess $600 in match to itself? Could the client recoup the amount by reducing future compensation and therefore not taking deferrals from that compensation? I can several different possibilities here, but the real question is am I right that this would be outside EPCRS and how are companies dealing with this type of legitimate compensation error when it occurs?

Thank you. I agree that a qualified plan would need to do all the things you mentioned if UBTI was on the K-1. In this instance, no UBTI was flagged on the K-1's, just the partners allocation of income and expenses. I guess I figured a K-1 without UBTI would be suppressed for a qualified plan in the same way a 1099 is.

A 401(k) plan sponsor client just received a few Schedule K-1s for participants in the client's 401(k) plan. The partner listed on the K-1 is the trustee of the 401(k) Plan. The Schedule K-1's were generated by investment alternatives under the client's self-directed brokerage window. No unrelated business taxable income is reported on the K-1. I wouldn't have expected to have these generated for a tax-qualified 401(k) plan, am I missing something? Should the client do anything with them? I was thinking of reaching out to the fund that generated them and ask why they were generated.

A client presently sponsors a non-qualified deferred compensation plan at the level of one of its subsidiaries. Plan is designed to be 409A-compliant. No rabbi trust or other funding vehicle is used, but cash and liabilities are kept on the books of the sub. Company would like to move the assets and liabilities for the plan to the parent company level for business purposes that are unrelated to the plan. Any issues under 409A or pre-409A income tax doctrines (i.e., constructive receipt or economic benefit)? My thinking and analysis is that there is no issue here. 409A's restrictions on funding are not implicated here. Also, no issue is presented under constructive receipt or economic benefit doctrine because the plan benefits are still subject to the claims of the parent company's creditors, and while the benefits may be slightly more or less secure depending on financial position of parent, there is still a substantial limitation on the right and it is subject to the claims of creditors of the parent company. I'm not aware of IRS guidance that directly addresses this issue.

Remember to consider requirements in community property states.

Does anyone have experience applying the alternative method of determining specified employees - specifically, if we determine our specified employees as all employees who are at a certain position level or above, do we have to constantly monitor employees to determine if they are at or above that level, or are we still able to rely on the approach permitted under the regs where we determine our specified employees once per year and update that list each April 1st.? It's not clear in the regs, but my reading of the regs and the preamble is that we are not permitted to rely on that annual determination process (i.e., we can't look on the separation from service date to our specified employee list prepared as of the prior April 1st and if he is not on the list then he is not a specified employee), and instead we need to know at the time a person separates from service whether or not he or she is at or above that specified level that we determined would reasonably capture all specified employees. That is, there is no list if we use the alternative approach, and specified employee status is determined by whether you meet the objective standard as of your separation from service date.

Discretion is generally a bad thing for an employer to have for amounts subject to 409A. With respect to whether a separation from service has occurred, I'd say employers have little or no discretion. If the reasonable expectation of future services is below 20% (or such other level in the plan) of prior level of service, then the employer should treat such event as a separation from service (unless it can overcome the presumption - just not a good idea IMHO). If the reasonable expectation of future services is 50% or more of prior level of service, then the employer should not treat such event as a separation from service (again, unless it can overcome the presumption - just not a good idea IMHO). If you are in between 20% and 50%, then look at the facts and circumstances (including the items George mentioned above), and clearly document the intent of the parties at the time of the event.

As a practical matter, what are companies doing to determine the level of bona fide services for purposes of determining whether an employee that will render some post-termination services has separated from service? If the employee is a typical exempt executive, the HR record might reflect 40 hrs. per week, but the actual services rendered might be more than that. The situation I see is an employee transitioning to a consulting role. We need to determine at the time of separation from service if the 20% threshold is reasonably anticipated to be exceeded. Are companies just using the straight 40 hours and saying that if it is reasonably anticipated that he will render less than 8 hours / week then there is a separation from service and if it is reasonably anticipated that he will render more than 8 hours / week then there is a separation from service? Any formal IRS guidance on this point? - I'm not aware of any. Thanks!

I think there are differing interpretations on this point. I understand the IRS' opinion to be that the 90 day rule must be written into a plan and the other "rule of administrative convenience" is for administrative purposes. That being said many practitioners think that this position is not supported by the text of the regs. I see more and more companies taking the position that plans can combine the two approaches, and include language to that effect in the plan. If you are drafting a new plan (and can administer it), I'd feel comfortable drafting the payment timing to be a specified date with payment being timely anytime within the "rule of administrative convenience" period. If you do that, make sure that you are clear that there is no right to interest due to such delay.

Thanks for the insight and the citation. The Chief Counsel Advice is very helpful. I agree that this type of program is not what Congress was worried about when it enacted 409A, but the 409A regs are so broad that they have to be considered. While the CCA does not mention 409A, it is significant to me that it was written on Dec. 17, 2007 after the 409A final regs were published (April 17, 2007) and that the prong of Section 83 that is relied on in the substantial risk of forfeiture analysis in the CCA is also included in the definition of substantial risk of forfeiture under 409A (the substantial risk of forfeiture definitions under 83 and 409A are different in other ways).

How are practitioners dealing with clients whose arrangements provide for post-termination of employment compensation based on payments within the controlled group? This can occur in a variety of sales situations. For example, Company A is the sales division of Goliathco and sells many products, including the products manufactured by Company B, which is the manufacturing division of Goliathco. Salesperson 1 is the top salesperson at Goliathco and would like to retire. Company A would like Saleperson 1 to transition her clients to Salesperson 2 prior to retirement. As such, Company A typically enters into an agreement to pay Salesperson 1 a portion of the commissions generated by Salesperson 2 due to sales to Salesperson 1's former clients for a period of 2 years following retirement. Because Company A and Company B are the same 409A "service recipient," the special date or fixed time rule does not appear to be available for any compensation paid based on the receipt of payment by Company A from Company B. None of the other 409A permissible payment events are triggers, so the only option left appears to be exemption as a short-term deferral. That approach would be premised on the likelihood of a sale not occurring constituting a substantial risk of forfeiture. That is so facts-and-circumstances based it seems risky. Am I missing something here? Thanks!

BG5150, in this scenario the relationship is outside of the plan.

If Paul Participant wanted to pay the some or all of the administration and/or investment fees for his 401(k) plan with a personal check instead of from his account, disregarding the administrative difficulties, could Paul do that? If not, what is the applicable law that prohibits it. I believe that he could do that for an IRA.

I wouldn't be so comfortable that the offer of an amount under the 402(g) limit to cash out an unvested balance works under this provision. I'd look at that closer. If you are comfortable, be careful not to permit discretion on the part of the executive. It must be mandatorily imposed by the employer.