Steelerfan

Not sure what you are saying. the ability to defer into a 401(k) can't be contingent on deferring into a nonqualified plan, but you can have the choice of deferring into either a 401(k) or a nonqualified plan. The problem i've seen is that some plans are spillover plans only and you don't ever get into the NQDC plan until you reach the qualified plan limit.

In the context of retiree health, the benefits typically are not subject to forfeiture or the employer would likely have ceased coverage (most employers I know of anyway). In this context, my interpretation is that it would flip you back to rule that benefits are deductible when paid or made available (the same as 404 timing rule), which is the time that they would be included in the employees gross income if they were not excludible under 104 or 105. I thought that statement in the committee reports was retarded. Without explanation they said if a plan only covers retirees it's deferred compensation. Who would do that anyway, and it makes no sense as a blanket statement? It created (in my feeble mind) the question of what happens when the last person covered retires and then everone covered is a retiree.

The IRS will not disqualify the plan. I'll go out on a limb and say they would NOT penalize every other participant for an error like this. You may be able to use the "mistake of fact" rules to return the money to the employer, but probably safer to use it to reduce future contributions.

the definition of "specified employee" for purposes of 409A also points to def. of key employee in section 416. Your legal department has to keep a running tab of who is in the top 50 or they're not doing their job.

I also think an excessive reserves could be corporate waste, remember that assets can't revert back to the employer, so you don't want too much in there.

They better get on the stick, they have to do it for 409A anyway. (helpful comment, eh!)

The following comment to that article seemed helpful in regards to OP: "The "problem" is that some teachers switched with only 15-20 years to go before retirement. They never should have switched. I have been in the TDC (401 k style plan) for 5 years with an average return of 8%. I have no desire to leave this plan. The problem is that most people in the TDC haven't used the system to their advantage. The plan offers a website with the ability to change and research fund choices. You don't exactly have to be a rocket scientist to see that if you leave all of your money in a fixed return money market account that you will not make very much. As previously stated I prefer to stay in the TDC, if I am forced to switch I will be looking for employment in another state. "

You have to check the contract to see who retains the liability. Normally I'd think the buyer steps into the shoes of the seller and becomes responsible for FICA. The way I look at it is that it will be the buyers responsiblility in reality when the IRS comes looking for the money, so the buyer has to make sure the tax is paid.

Excellent, didn't see that second sentence in the committee report, but that about settles that. thanks!

Don-thanks for the ltr Rul. Vebaguru-thanks that's what I suspected, but wanted some verification as these statutes are almost incomprehensible to me--I've done lots of qualified plan work in the past so you'd think I'd be used to it. There's one other potential problem I see with this scenario. The TRA '84 conference reports indicate that a retiree health plan that exclusively covers only retirees cannot get the deduction for funding a reserve for post retirement medical under code sec 419 and 419A because such a plan is really deferred compensation and deductions are covered by sec 404. A remaining question I have is whether you're ok if the plan at one time covered active employees. In other words, are you alright if everyone covered by the plan is now retired and no other active employees are covered if the retirees had coverage when they were employed. Or does this portion of the legislative history mean that when the last covered employee retires, you cannot accelerate the deduction and now must start treating the plan as deferred comp? One other comment on deducting the insurance premiums. I thought the idea was to deduct the contribution to the VEBA and have the VEBA pay the premiums, so who cares about deducting the premiums?

Thanks for verifying. I was pretty comfortable with it as Dan Hogans had sanctioned the idea. But even still, I can't see fussing over this. The 6 month rule really shouldn't be a big deal for those who are suject to the rule since they get gazillions of dollars while their working, and then would have to wait a whole six months for another few gazillion. I can hear the violins playing.

Don: The way I read section 419 is that it creates no tax deduction, but rather states that an amount must be otherwise deductible, so it seems you could fund even if not deductible. I'd have to think this would be a rare situation since most employers are more concerned with tax breaks than protecting welfare benefit assets from creditors.

I have an employer considering using a VEBA to fund post retirement medical benefits, which are currently being paid on an as you go basis by the ER, with FAS 106 liabilities being booked. All covered individuals are already retired, ie, no active employees are eligible for retiree medical. Employer already has a VEBA set up for other welfare benefits, such as LTD, so adding this benefit would not be a major problem or hassle--my questions relate to whether or not using the VEBA would be the best solution. Questions: 1. Under 419A, if the employer funds the VEBA with cash equal to present value of benefits (being that the remaining working lives of all the retirees is "0"), would income accumulation on the assets in the reserve be subject to UBIT? 2. If so, does funding the VEBA with life or health insurance solve that problem? 3. Is a VEBA really necessary, or would a taxable welfare benefit trust or full insurance essentially provide the same result as a VEBA. Anyone have any insight--the goal is to reduce the FAS 106 liability and obtain maximum tax benefits?

I can't tell whether the OP is saying 409A is inapplicable here, or that he has 409A under control. Depending on when the legally binding right to a payment comes into being, 409A is certainly a major concern with this type of arrangement regardless of whether there is merely a "lump sum" payment or a "deferral of compensation" under the 125 regs. The 409A regs have lot to say about payments of cash at severance and the right to receive welfare benefits after termination. Not saying I have the answers here, just giving a heads up.

I think you're right, I've always interpreted that as meaning they can apply the pre-ERISA vesting schedules, but couldn't cut back. Chances are there's state rule that would prevent it.

If you can show an exemption for gov't plans from IRC 411, please do so. I have in the past successfully taken the position that governments can't cut back benefits, as they are running qualified plans. Participants have no ERISA claim obviously, but in order to preserve tax benefits to participants (exclusion from GI for vested benefits), even governments have to follow the qualified plan rules. Certainly other state contract, fiduciary and statutes/constitutional laws may apply to prevent cutbacks as well. But I've found that government plan officials suffer from the "god" complex, so its always news to them when they find out they can't do what ever they want. The more ammunition you have the better.

How can this be anything other than a violation of the plan asset and exclusive benefit rules? People may try to argue that as the owner, the the plan asset reg doesn't apply because there is no "withholding" per se. But more and more courts are holding that unpaid contributions that are owed to a plan are credits to the plan and are therefore plan assets. No other result makes sense--you could too easily skirt ERISA's protections by never actually contributing to the plan? In the recent case of United States v Jackson (US Ct of Appeals 4th Cir 2008), two individuals were convicted of theft of contributions under ERISA for amounts that were never contributed to a pension plan but were due and owing. I think this would be applicable in the 401(k) context as well.

Good point Chaz. would be kind of silly to allow a service provider to vest his payment early. Does anything about accelerating vesting scare you at all? I mean there's always that creeping fear that acceleration clauses will be abused, especially with the top people. Who is going to tell the CEO that his comp will be forfieted if he leaves early when there is discretion to accelerate? I've never been a fan of this.

This is the area where it behooves the employer to expressly put in the documents that the payment will occur within the 2.5 month rule--so you get the benefit of having until the end of the calendar year in case you screw up. If you just leave it as is, you be ok but only if payment is actually made in all cases by March 15 of the year following the year of vesting (you don't get until the end of the year).

There isn't nearly enough information in your post for anyone here to advise you. YOu have to find out what type of plan each one is (defined contribution or defined benefit) and how benefits are calculated. Your employer should be better equiped to help you. If you don't trust them, get an attorney or personal financial advisor. Remember that even government plans are subject to the IRC and section 411(d)(6) effectively prevents them from cutting back any accrued benefits you have earned.

I think you would have a problem if the second trigger isn't a 409A permissible event, and you're beyond the time for payment under the first trigger. To do something like that, I'd try to structure the second trigger as lifting an SRF and fit w/in the short term deferral exception.

You can use any definition of CIC you want as a trigger to a right to payment, but only the 409A definition if you want to use it as a payment event. But this only makes sense to me if the definition you use is more lenient. If it's more restrictive, wouldn't the 409A definition essentially be met?

I've seen plans that continue vesting for things like qualified retirement (i.e. with the consent of the empoyer). I'd think that a continued vesting provision for someting like "unexpected" leave is rare and not recommended. My personal view is that section 83's requirement that there be future substantial services performed in order to delay taxation is incompatible with the idea of allowing an inactive employee to continue vesting. There's always a noncompete agreement, but since the person is not terminated, it doesn't seem applicable. If I were the IRS looking at such a provision, I'd argue that there is no more SRF as of the date of leave, as the employer is obviously not going to forfeit the stock, except is some rare circumstance that might kick a bad boy clause into gear-which we know is not an SRF. What good is a golden handcuff if you can vest and get paid while your not even there? HR departments always seem to want the flexibility of not forfeiting the stock and not accelerating vesting, while at the same time delaying taxation. Restricted stock does not have this kind of flexibility.

Exactly, that rationale would apply to tax all NQDC salary deferrals, which is why my initial inclination had been to apply tax at the time of contribution. But the summer 95 bulletin made it clear they will follow the federal rules for all unfunded, etc plans. The later winter bulletin says, well, what we meant was we'll follow the federal rules except for 457 plans. I agree that it doesn't make sense, but it is what it is. It's as if someone later realized they stuck their foot in their mouth and they won't acknowledge the gaffe. to top it off you still get inconsistent anwers. The other annoying thing is that the guidance you cited merely says that all employee contributions other than 401(k) are includible in income at time of contribution. As usual, rather than hit the problem head on, they buried a negative implication rule inside the guidance where most people don't even realizes it's there. This mess has no clear answer, except that they seem to have, without explanation, concluded that they now won't follow the federal rules anymore. But is this enough to change an entire payroll practice? The other thing about this is when PA tried to tax deferrals like this, there was practically a bloody revolution until they amended the statute to align with federal treatment. This is no small thing.

mjb and XTitan have nicely laid out the problem. The earlier guidance follows federal constructive receipt rules and the later guidance, handbook, etc., state that contributions are taxed on the way into the plan. This is a massively unfair change in position with no discussion of the effect on employers who relied on the mid-90's guidance. Now you can't even get through to anyone at customer service in the Division-there all busy taking gifts from vendors. And despite what mjb points out above, we recieved an email recently that verifies that salary deferrals in unfunded plans won't be taxed until distribution. NJ is a mess is many ways right now. Don: good point, both are promises to pay a benefit in a future year, except keep in mind that accounting rules are separate from tax rules. Under a NQDC plan, employers can't recognize the liaility for purposes of tax deductions until the amount is acually paid to the individual. At least with retiree health care you have the option of immediate tax deductions.