Steelerfan

Interesting advice. Not sure what counsel would be referring to. You would be hardpressed to find a plan with termination for cause provisions because you cannot forfeit qualified plan benefits on account of termination for cause. Such provisions aren't enforceable and the IRS would not provide a favorable determination letter on such a plan.

Unless a claim is for fraud, allegation of specific facts is not generally required to sustain a complaint. E.g it would be enough to simply allege that an instruction was given and not followed by the plan fiduciary. On a motion for summary judgement the defendant could submit evidence that no proper instruction was given, etc. Otherwise, if there is a trial, the facts will come out. As stated previously, this appeal will not decide whether the plaintiff will succeed on his claim, but rather whether such a claim can be sustained under ERISA. If so, the plaintiff could very well lose anyway. This happens all the time and is nothing new or unusual.

I can't imagine a plan that doesn't require the loan to be paid in full or deducted from the payment at distribution. I would think it would be executor's responsibility to pay the debt of the estate prior to distribution, otherwise the beneficiary would have to recover from the assets of the estate. If there are not enough assets, the bene would be out of luck, I guess. There is probably a way for the beneficiary to become a creditor of the decedent even if he/she is not an heir or legatee, but it shouldn't get that far if the estate can pay. But I'm not an expert in this area.

I would guess that it could be. My understanding of the IRS position is that a termination for cause (1) cannot create an SRF and (2) cannot be a 409A payment event. At least one prominent attorney is advising clients to remove such clauses from plans subject to 409A. But neither of these two situations occurs in the case of a separation pay plan, as long as you aren't relying on the STD exception and are otherwise within the 2 year/2x rule. I wish they would clarify this.

They're only box 1 wages. You can't use box 12 code z or the irs will be looking for the penalties and interest.

The STD rule can also apply if payment is made withing 2.5 months after the year in which the person obtains a legally binding right to payment. So, it might be easier on these "facts" to argue that otherwise ineligible employees who become eligible had no legally binding right to the payment prior to the CIC rather than subject to SRF. After all, how can a payment be subject to forfeiture if you were not eligible for the payment in the first place?

I don't understand his response, or really the question maybe. Why would a plan provide for payment on the possibility of a change in control; don't believe i've ever heard of that. It's rather obvious that you'd have to have a 409A compliant definition in order to distribute, and that the CIC would have to occur. Also, how is this not an operational error? But I agree with you, it seems the IRS would have to allow you to unwind the transaction (practicalities aside) if the CIC didn't occur within 30 days. Maybe the lesson is not to actually distribute until the CIC occurs, then all you would have to do is undo the termination resolution. Also, chaz's idea of STD sounds promising but only if there would have been no right to the payment but for the CIC. It almost sounds in your OP that some participants would have no LBR to the compensation unless a CIC occurs. If that is the case, the STD could apply.

Just the one for the company I work for and I don't want to disclose that here. It could be for the omnibus plan, but I don't think so, because the prospectus supplements relate only to the grants of units, which are separate agreements. Maybe they're being overly cautious or could it be that the executive is a proxy officer, and that's why?

You're right about that, but public companies will normally file an S-8 and provide a prospectus supplement with grants of phantom units just in case. With these equity-flavored plans, are you 100% comfortable not complying with an exemption?

I think the SEC considers an interest in a NQDC plan to be a security, thus creating the need for registration or satisfaction of an exemption. As to how to value them, that is the big problem under 701, assuming that exemption is available. Restricted stock should not require an exemption as it is not NQDC.

Why are you trying to fit them into the "leased employee" rules of 414? They do not appear to be leased employees as that term is defined in the code. Aren't they basically temporary employees until made "real." If so, the IRS guidance on determining who common law employees are is the appropriate guidance, not the leased employees rules.

Just because an in the money option is involved doesn't make the option a discounted stock right, does it? Assuming the option would otherwise be excluded from 409A, this amendment would cause an option that would expire to be extended, which would cause it to be subject to 409A but then made to comply with 409A at the same time. I don't know if this can be done, but I don't see why not, at least while we're in the transition phase. Why would the IRS argue? I have a similar question with respect to restricted stock. Could you take restricted stock that could forfeit in 2007 or 2008 (but is exempt from 409A at this time as sec 83 property) and extend the forfeiture period and make it comply with 409A--like convert it to RSUs and set the payment date farther down the road? I think this is the same legal question.

The way I interpret the rules for your facts is that the individuals always were the employees of the plan sponsor, otherwise you couldn't count their prior service for eligibility. That's part of the point I'm trying to make in this post. That's the reason for applying the common law test to determine who is an employee. You count the service because they were actually employees from the beginning, even though paid by a third party and even though the employer didn't treat them like employees. When you say "once the individual becomes an employee", it's more like the completion of a formality-they already were and now they'll be on the payroll. Most employers in my experience never really get this concept. There's not as much choice as employers like to think there is.

There's also a rev rul that discusses who would be a worksite employee and how to apply the control test. but the bottome line is you can't know who the employer is without applying the dominion and control test to determine who the employees are under the common law. Looking at it from who the employer is seems confusing to me because it's not like there is any law or definition of what an employer is, other than the plan would define employer as the sponsor. that doesn't really add much to the analysis.

Vizcaino v. Microsoft, (1997), 120 F3d 1006. (Common law employees are included for 410(b) coverage purposes.). Leased employees who meet the definition are also included. A class of workers who signed an agreement when hired that they were independent contractors not eligible for employee benefits, but who were later retroactively classified by IRS as employees for withholding and FICA tax purposes, were improperly excluded from participating in the employer's employee stock purchase and 401(k). The employer accepted the IRS determination on audit that the workers were employees based on the common law control test, but argued that the terms of the plans and the employees' hiring agreements prevented their participation. The Ninth Circuit disregarded the hiring agreements and held that the workers should have been permitted to participate in the stock purchase plan. The court sent back to the 401(k) plan administrator the issue of whether the 401(k) plan's exclusion of employees who were not on Microsoft's U.S. payroll applied to the freelance workers, even though they were employees. The moral of the story is that if an individual is an employee under the common law test, an agreement can't override the test--it is what it is and the employer can't do anything about it. If you can pass the coverage test with an exclusion for temps (who are otherwise CL employees) then you will be ok. If you would fail the coverage test, then you would have to make retroactive contributions for them.

P.S. note that based on the facts you gave, the likelihood that these people are employees in the first place is high, e.g., they are under the dominion and control, etc., of the employer and after the probation period when they become official nothing really changes. This can be a trap for the unwary--depending on how the plan is drafted, there is a risk that not including them in the plan is a violation a la Microsoft.

The common law test is used to determine whether these individuals are employees for purposes of the plan, regardless of who pays them and regardless of how it is reported (except that these are factors to be considered). If the test is satisfied, they can be in the plan. All the facts and circumstance of the relationship need to be analyzed and counsel should be retained to make an opinion. The case mjb refers to I think (probably) is the famous Microsoft case. If I recall correctly the ee's were temps who were determined by the court to be employees and so should have been included in the plan. There might be a practical problem if they aren't on the employer's payroll.

457(b) plans are exempt from 409A because they are considered qualified plans.

The reason qualified plans don't have bad boy clauses is that vested means can't be forfeited for any reason. I understand an employer not wanting to pay, but I don't see how it's legal to deny or delay payments, you could cause a plan failure.

If the life insurance policy had the effect of spreading out or alleviating tax liability while providing a relatively equal value, it would probably be considered a subsitute and could violate 409A. You need to read the rules on subsitituting for deferred compensation. Before the end of 07, you might be able to use the transition rule to change the execs current election and distribute the LI policy in 08 lieu of the lump sum.

I don't either. If there is no requirement that the transportation be local, then I can't see why not. My comment was kind of looking at the whole picture beyond your Q on the transportation fringe. When employees have arrangements like this, you have to keep an eye on other tax consequences. If she is not being reimbursed for meals and/or cost of housing for the week, such expenses would not be deductible by the employee (she may or may not be trying to deduct the expenses). If the employer is reimbursing the employee for such (travel-related) expenses, the reimbursements would be income or wages (if the reimbursement is under an accountable plan) because the expenses are not deductible under 162(a). (Her "tax home" is likely where the employer is located and thus she is not traveling away from "home.") The fact that transit expenses in this scenario could be reimbursed under a qualified transportation plan is a nice way around the harsh travel expense rule, which would otherwise make the travel expenses in your scenario nondeductible and thus not reimburseable as a business expense. Of course the employee would have to give up using their car.

Ok. I'll leave out "fat" when referencing you!

Before it gets that far, shouldn't the plan sponsor as FIDUCIARY at least try to correct the defects, pay the penalty and "regain" qualified status-as intended. Techically every qualified plan with a defect is "nonqualified". That doesn't mean you throw in the towel, hire fat bloated tax counsel and pay the tax. You go to the service first, that's what the correction programs are there for. The IRS does not disqualify plans as a general rule, they do not "like" to do so, and they rarely if ever apply the draconian disqualification penalty. Also, the IRS will argue that the SOL never ran for obvious reasons. Why tell a client to give up ship without a fight?

Just saw this post on a search. Also when the commute requires an overnight stay you are into the travel expense rules, not local transportation; in this scenario it looks like her travel expenses would be non deductible because her employment is not temporary and she chooses to live far away from her principle place of employment.

a) Probably subject to penalty tax, a discounted option would currently violate 409A if you can exercise at any time, even though you in fact exercise on termination. b) If the option violates 409A, it needs to be fixed before you exercise, but your employer must decide what action to take (which it seems to have done) c) No, your options exercised in 2005 do not taint the rest of your options--there is no 409A penalty on that exercise. The aggregation rule would apply to exercises after 2005. It seems that if you exercise these options, you would have to take whatever 409A consequences occur. It's not the end of the world, an additional 20% tax is better than leaving all the vested options on the table if you leave.