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.

Looking for thoughts on an issue of first impression for me. Company A is the parent of Company B. Employees of Company B participate in a nonqualified deferred compensation plan maintained by Company A. Company A spins off Company B and, for business reasons, does not terminate the NQDC plan as to the employees of Company B (as would be permitted under Section 409A's termination rules in connection with a change in control). Employees of Company B have not undergone a separation from service because of the spin off because they still work for Company B. Company A retains the pre-spin liabilities relating to the NQDC plan and arranges for Company B to notify Company A when an employee separates from service with Company B (and all the post-spin entities in Company B's new controlled group) so Company A can commence payment under the NQDC plan. Following the spin-off, for business reasons, Company A and Company B want to allow employees of Company B to continue to participate in the NQDC plan maintained by Company A for a period of years. Can employees of Company B participate in the NQDC plan maintained by Company A once Company B is no longer in Company A's controlled group of corporations? If Company B wants to provide the same benefit post closing, does Company B need to set up its own NQDC plan that "mirrors" Company A's? What about funding - If Company B sets up its own NQDC plan, can Company B send the contributions to Company A to administer and not result in income inclusion under a constructive receipt/economic benefit theory because the contributions are no longer subject to the claims of the creditors of Company B? It seems to me that Company B can leave behind with Company A the pre-spin liabilities relating to the NQDC plan without issue. Keeping any assets related to those liabilities with Company A makes sense because Company A is responsible for payment. Post-spin participation of Company B employees in Company A's NQDC plan seems problematic but can't nail down exactly why. It also seems that if Company B sets up its own mirror plan, any funding must be left with Company B or be put in a rabbi trust that is subject to the claims of Company B's creditors. Sending contributions for post-spin obligations to Company A, or putting in the rabbi trust for the NQDC plan maintained by Company A (which is subject to claims by Company A's creditors) seems problematic because the amounts are no longer reachable by Company B's creditors.

A stock option agreement provides for a NQSO with an exercise price of 100% of grant date fair market value of the underlying stock; however, the stock option agreement also provides for a bonus equal to the exercise price for each share exercised, which is payable upon exercise. Am I missing something, or is this bonus contingent upon exercise a reduction in the exercise price such that the option loses its "stock right" exemption from 409A? Seems straight forward to me, but I'm wondering if anyone sees a different analysis.

I agree. Take a look at Q&A 21 to the 2009 JCEB Meeting with the IRS. It is a more complex fact pattern, but appears to address the same issue. Specifically, look at the IRS Proposed Answer A: "The Service representative disagrees with the proposed answer. There is no regulatory exception that would allow the service recipient to accelerate payments due to a separation from service where the plan does not provide for such a payment date or, as in this case, where the plan provides for a different type of payment upon separation from service. It generally would be permissible, however, for the plan to provide for a different form of payment. For example, the plan could provide for a lump sum payment during 2009 in the event that the separation from service occurs before a specified date."

A company grants a stock option with typical option features (subject to a vesting schedule and then exercisable over a set period of years with shortened exercise period based on the occurrence of certain events (death, disability, etc.)). However, the option is granted over shares of preferred stock that have a dividend preference, such that the preferred stock will not qualify as "service recipient stock" under Section 409A. Therefore, the exemption for "stock rights" is not available. The stock option also does not comply with the requirements of Section 409A because it is not exercisable solely upon a permissible payment event under Section 409A. Therefore, the stock option violates Section 409A. A formal IRS correction for this type of failure is not available. Any substitution of a replacement stock option that meets the requirements for exemption from Section 409A would violate the substitution rule under Section 409A. Therefore, the stock option is an uncorrectable failure subject to the penalties under Section 409A. Anyone see a better outcome in this situation?

Does anyone have some insight into what to what is meant by the following language in 1.409A-1(b)(5)(iii)(A): "Except as otherwise provided in paragraphs (b)(5)(iii)(B), ©, and (D) of this section, the term service recipient stock means a class of stock that, as of the date of grant, is common stock for purposes of section 305 and the regulations thereunder of a corporation that is an eligible issuer of service recipient stock (as defined in paragraph (b)(5)(iii)(E) of this section). Unless I'm missing something, I can't find anything in Section 305 or the regulations thereunder that helps define common stock.

Provided you are not exempt from 409A under any available exemption, I'd think the terms of the note would need to be 409A compliant. 409A is concerned with the timing of income inclusion on the part of the recipient, and the income inclusion would presumably occur when the installments were actually paid pursuant to the terms of the note. Generally, I think 409A makes compensatory promissory notes very dangerous (e.g., a discretionary payment acceleration provision on the part of the company would cause a 409A documentary failure).

An NQDC plan currently provides for payment upon the earlier of a 409A-compliant Change in Control event or a 409A-compliant Separation from Service. NQDC plan sponsor would like to remove Change in Control event as a payment event and leave only the Separation from Service as the permissible payment event. The guidance in 1.409A-2(b)(6) indicates that the deletion of a permissible payment event is subject to the subsequent deferral election rules under 1.409A-2(b) where the deletion of the payment event may result in a change in the time and form of payment of the deferred amount. 1.409A-2(b)(6) also states that the subsequent deferral election requirements are applied separately to each payment upon each payment event. I'm struggling to determine how to apply this guidance in this situation. Does this mean that the subsequent deferral election rules would require the change not to be effective for 12 months following the change, and for the payment event to simply be 5 years following a Separation from Service? This would seem to satisfy the five-year push requirement because in any instance, even if a Change in Control occurred immediately, the payment would be delayed an additional five years.

An employment agreement provides for the payment of deferred comp, the payment terms of which would be compliant with Section 409A if triggered by a compliant change in control event. The agreement lists several change in control events, including a Section 409A compliant change in ownership provision, a Section 409A compliant change of effective control provision and a Section 409A compliant change of a substantial portion of the assets provision. The agreement also contains a provision defining a complete liquidation of the company, or approval by the shareholders of a plan for liquidation as a change in control event. This seems to be too broad for a Section 409A compliant change in control, any thoughts?

I'm familiar with the categories of plans for the purposes of plan aggregation, however, I have a question regarding the scope of plan aggregation with respect to non-qualified stock options. As I understand it, the plan aggregation rules under Section 409A provide that deferrals of compensation with respect to an employee, to the extent such plans are stock options or stock appreciation rights subject to Section 409A, are aggregated and treated as if deferred under a single plan. I'm trying to clarify what exactly that means with respect to other stock option grants to the same employee. For example, ABC company grants employee Z a non-qualified stock option that is granted with an exercise price below grant date fair market value. That NQSO would be subject to Section 409A. For the purpose of income inclusion, would that stock option be aggregated with: (1) all other stock option grants to employee Z from ABC company, or (2) only the stock options granted to employee Z that are subject to Section 409A because they were granted with an exercise price less than grant date fair market value, or similar failure to comply with Section 409A?