Steelerfan

Reading the regs plainly, you could come to that result, but they aren't exactly crystal clear. If you are still an employee, then you did not separate from service as a specified employee, which is arguably what the rule requires. You could read the regs as requiring that the separation from service be both a separation by a specified employee and as a specified employee. It doesn't make much sense to apply the six month rule to the retirement of a specified employee from services as a director while he continues on in employment as a specified empoyee, but that could be correct. This is probably something else the IRS considers a stupid question while they continue to provide detailed explanations for other rules that that are simple enough for my cat to understand.

I wouldn't try to argue SRF since this agreement doens't require the substantial performance of services to obtain the amount, which is the 409A standard. Part of the reason why determining if a separation from service has ocurred would be helpful is that if he has truly separated as an employee then he cannot currently be a specified employee and therefore whether these payments could be considered to be made upon separation would only matter if the IRS has reason to believe you are trying to get around the 6 mo. delay rule. That said I think it's a stretch to argue that these payments could be subject to the six month delay rule on the theory that he was a specified employee when he separated and these payments could be considered payments due to that separation. If you are looking for some more assurance, I agree with CAbatty that if the legally binding right is created while the executive is an independent contractor, these payments would not be subject to the 6 mo delay rule. The way I understand the 409A scheme, is that a payment upon separation means the payment event is the separation and that a previously earned amount is being paid. In your example, the payment event is not separation, they are merely payments made under a set time and form. But I like the idea of using the STD rule when in doubt.

My understanding of the regs on this is that if the director's plan is not aggregated with any plan in which he participates as an employee, then he can terminate as a director and take a distribution without regard to the six month delay rule because in this situation there is no separation from service of a specified employee. By contrast if the plans are aggregated, then no separation from service ocurs until he separates from both positions and then the six month rule would apply to both distributions. I can't believe the regs don't squarely address this. Any one else care to speculate?

What about EPCRS and the DOL fiduciary/delinquent filer programs? Depending on how much the penalties would be it might be better than taxing the participants. Remember, It's not just the trust that is taxed, it's also the participants under the economic benefit doctrine.

Not exactly, but stating how the salary will be paid in such instances is smart. Many of the "consulting" agreements I've seen (including the one described here) seem to be little more than excuses to pay an exec some money or in other cases an attempt to keep an executive who doesn't really want to be around full time. But in these cases, there is often a "guaranteed" payment involved. No matter what happens, he's gettin paid. It looks like salary, but it's guaranteed like a bonus, only payable in installments that look like salary. This is common after a CIC. The consulting agreement adds an air of authenticity as though the executive is earning the money. In these types of agreements, I think 409A should apply. For example, the executive should not be able to go back to the employer and say, lets call this off and just pay me the rest of what you owe me now and we'll part ways. In your example above, that looks more like a statement of the base salary payable as long as the executive performs--that doesm't look like deferred comp to me. I agree with mbw that simply being available to work doesn't create an SRF. 409A does not recognize forbearance of working as an SRF (as does section 83) Good question tho, what happens if he takes another job, will the employer stop paying?

Not sure I agree. I look at these consulting agreements as agreements for a term. In the normal situation of salary, there is an at will relationship to pay ongoing as the money is earned. But in a contract for a term with payments that go beyond the STD period there is a legally binding right to comp beyond the 2.5 months. Albeit complying with 409A is easy, all you have to do state how payment will be made, such as in accordance with the compnayies normal payroll practice, monthly, etc.

You have to wonder about that; employer's, not being used to the constraints of 409A, seem to be operating under the assumption that they can still just renegotiate prior agreements and change the payout timing or form without regard to whether 409A would consider the new agreement a substitute and thus cause a vialation.

Looks like you need to be sure a separation from service has even ocurred. These scenarios always concern me. He'll probably do about as much work as he did when he was an employee.

I'm not sure I agree with that statement. If CIC is a deciding factor in whether benefits are paid out at all looks like CIC is a vesting event and not a payment event. Without knowing more I agree with CABatty, looks more like CIC is a vesting event and not a payment event.

Some plans require that an amendment not reduce any material rights under a plan. I'd say this change would take away a substantial tax benefit and thus would normally be a contractual violation w/o participant consent, otherwise the transition rule would allow it.

If you terminate account balance plan 1 you have to terminate the entire account balance plan 2. the termination rules are different from the failure rules. The idea with these rules is to prevent executives from accelerating the money out of one plan but continuing to get tax benefits from another plan.

Assuming they are the only AC plans Jim is in, number 1 is correct. It's the participant not the plan that bears the penalty of a violation. The 409A failure rules sort of force you to look at a "plan" as an individual arrangement between the employer and an employee and less like a plan in the qualified plan sense.

We've taken the position that incorporation by reference is permissible. All of the guidance to date has indicated that the written plan document requirement should be (and is) limited to the material terms of form and timing of elections and payments, how much or formula, and the six month delay rule. Beyond that I don't think the IRS cares.

Check the preamble pp 19248 and See the other thread on this topic. You might be making it too complicated. If the benefits are unfunded, what premiums are you talking about?

I agree with your recap. I seem to be hung up on group term life because I was thinking (maybe wrongly) that the employer is continuing to pickup the premiums for the executive (in the same manner as during employment) and that that isn't really a reimbursement. The insurance would be "in kind" because the employee is not paying for his coverage and need not seek reimbursement. My understanding of a reimbursement is the employee directly incurs an expense and is reimbursed. Am I off base? Is that too narrow a concept of reimbursement or do most employers actually reimburse the employee for group term life? As you say tho, it might not make a difference.

The regs state generally that conditions under the discretionary control of the employee (other than the decision whether or not to continue working) do not create an SRF. Regardless of the absurdity of an employee being in discretionary control of the "cause" event, note that only conditions that relate to the performance of services, such as continued substantial performance or meeting a performance goal can create and SRF. (these are ideas borrowed from the section 83 concept). I agree it should be cleared up, but those rules can be interpreted to reach the result the IRS wants without defining cause. A payment conditioned on termination for cause, regardless of the definition, is NOT conditioned on an event that is related to the performance of services. The event--Cause--has nothing to do with the employee's performance or the employment relationship. You might get clarification from the IRS but it might not be what you're looking for. Also, are you willing to take the risk of drafting your plan to provide for payment upon involuntary termination (without mentioning cause or not cause), only to have the IRS subject your plan to 409A because you didn't make the clarification stated clearly in the regs that the an involuntary termination NOT FOR CAUSE is what creates an SRF?

CABATTY- thanks for your responses. The way I interpreted the provisions applicable to taxable welfare benefits like group term life insurance is that it is an "in kind" benefit. If I recall correctly the preamble states pretty clearly that after the end of the second year following termination, the 409A exemption ends and thereafter you have to provide for a 409A compliant schedule for such benefits. that seems to conflict with what you said above. Assuming you are kicked back into 409A in the third year and beyond (if applicable), is it as easy as the IRS seems to suggest to provide these benefits in accordance with 409A? As others have suggested there isn't much to go on. But if the employer continues to pay premiums in the manner that it has always done, shouldn't that be enough to comply with 409A? any thoughts on that? I agree with someome else who said that reimbursements or payments made for non taxable benefits like medical plans are completely exempt from 409A. But what if something goes awry with the taxable treatment down the road? Am I off base here or is this a legimitate concern?

One final comment on this (as the horse is probably dead already). I think the most important statement in this thread is when jhall said "It seems to me part of what factors into Treasury's thinking on this is not so much what the overall likelihood of forfeiture may actually be in a particular situation but the ability of the executive to cause the result to come about." I think that is what's going on here and this seems to be at least one of the reasons the IRS did not adopt the commentator's suggestion that the section 83 definition be used--because 409A serves a different purpose. For example, when interpreting section 83, the tax court in Burnetta ruled that the possibility of a termination for cause was too remote to present a substantial risk that amounts will be forfeited. If you take the inverse of that logically, you could say that a payment that vests on a termination for cause should be subject to SRF because the likelihood of such a termination is so remote that the payment might not ever vest. Now this may sound overly obvious from here on out, but note that forfeiture and payment are not the same thing. And (especially with recent goings on in the corp world) the IRS might naturally be of the opinion that the inclination of a corporation to pay (even in the face of criminal activity) is greater than the inclination to forfeit. Thus, where a payment would vest on termination for cause, the possibility of termination for cause might naturally become much less remote (perhaps a little too conveniently) in an effort to get around 409A (after all when was the last time you heard of an exec trying to get terminated for cause so he could forfeit his benefits?). And that's really all they appear to care about-that no one get around 409A. That being said, maybe there is a chance that under pre-409A law an SRF could still exist despite a payment on term for cause??

Read the legislative history--409A is effective only with respect to amounts deferred after 12/31/04. I wouldn't go further than that. Curious what others think.

Curious as to why you think it's a new plan. How are the granfather rules dependent on who the service recipient or the plan sponsor is?

to anwer your question directly, the regs do say that only an involuntary separation from service without cause creates an SRF. Using that as a starting point doesn't bode well. Maybe that's why they think it's a stupid question. It seems that you would have to specify that the involuntary termination must not be for cause to have an SRF, The question originally raised was not an SRF question, that's true. But based on the IRS answer, the rationale suggests no SRF because of the "discretion" they feel is involved. I think it has to do with the employer's additional discretion to determine if cause exists and then whether to act on it by firing the employee thus causing a distributions to occur in violation of 409A, as opposed to using there unilateral authority to fire. This thinking wasn't clear to a lot of people and that's why the IRS was approached about it. The IRS thinks it's obvious, but it doesn't make much sense to me. But maybe the argument is fruitless since a payment upon an involuntary termination for cause is not considered an enumerated payment event under IRS interpretation, and so you can't (according to them) have such a provision added in your plan. The way I understood it you couldn't even have it in your plan if it were the only payment event. However, I don't think this means you couldn't make a distribution after a termination for cause if the plan provides for payment upon separation from service as defined in 409A, and you met the definition-- it just wouldn't create an SRF because that definition includes voluntary separations.

I would think that is ok. If you wanted the first payment to fit within the STD exception you'd have to have some additional language involving the specific timing of that payment and then making it clear that each payment is a separate payment. that way, the first payment would be exempt and the subsequent election rules would apply to each subsequent payment separately and not as though the installments were considered one single stream of payments like an annuity.

STD deferal rule won't apply unless you designate each installment as a separate payment and you're sure there's an SRF. I agree March 1 is objective, the regs trip me up by saying you have to state the calendar year in which the distibution will occur, but you obviously can't tell with out a crystal ball what calendar year a separation will occur.

I have heard from a reliable source that this legislation will be introduced this month. It will also include the $1 million cap on NQDC per year under 409A, but without the "lesser of" provision previously introduced. If this passes It will become impossible for companies to payout huge severance packages and take a deduction. I guess they want more money for the war.

Not sure if saying payment starting March 1 after separation from service is "an objective payment date based upon the separation from service event". See the blurb below from the preamble. You might have to say that the first payment will be made within 90 days from separation, then each March 1 thereafter for 4 years. If anyone thinks that't wrong, please say so. By contrast, a payment scheduled to be made to such a service provider at any time on or before July 1, 2008, would not be deemed to have a fixed payment date, because the payment could be made before January 1, 2008. In addition, a payment scheduled to be made to a service provider, for example, within 180 days of a separation from service generally will not provide for a specified time and form of payment under the final regulations, because it specifies neither the taxable year of the service provider in which the payment must be made following the separation from service, nor a period of 90 days or less following the separation from service in which the payment must be made. Because such a payment schedule would not provide an objective payment date based upon the separation from service event, the payment also would not be eligible for the relief provided for payments made by the later of the end of the taxable year of the service provider or the 15th day of the third month following the specified payment date. However, a plan provision providing that the payment will be made within 90 days of a separation from service generally will be treated as a specified payment date, and for purposes of the subsequent deferral rules the date of the separation from service will be treated as the scheduled payment date.