Steelerfan

Close. There are two distinctions the IRS is making, one is between whether your current good reason is SRF or not, and the other is whether it is safe harbor SRF or not (assuming there is an SRF). If the former applies (i.e. not SRF), you cannot amend (ever); if the latter applies (i.e. non safe harbor SRF), you can amend before 1/1/08. My understanding of the regulations is that it would be possible (even after 1/1/08) to have a non-safe harbor good reason that creates an SRF, but there would be enough doubt to cause chronic back and neck pain, with sciatica and carpal tunnel (thus the comfort of the safe harbor). So what the IRS is saying is that your current non safe harbor definition must create a valid SRF; if it does not you will not be able to amend it to make it safe harbor, even before 1/1/08, because you lost your SRF (and can never get it back). The trick is being certain that the non safe harbor definition creates an SRF. You're on your own there.

Anyone familiar with this insurance product? The intent is to use TOHI to get retiree medical liabilities off the books and the accelerated deduction. Specifically, since you can accomplish the same business and tax goals with a self-funded VEBA, what would be the benefit of funding the VEBA with health insurance other than to make the insurance company richer?

Actually, the 2.5 rule can apply to immediately vested amounts because the rule uses the later of the attachment of a legally binding right or the lapse of a SRF. So, it's legally possible, but utterly ridiculious, to draft an elective deferal plan to require each year's deferrals to be distributed by 2.5 months after the end of the year in which the deferals were earned. That would obviously be ridiculous since the idea (presumably) is to defer the compensation more than one year. Couldn't it be possible to still have elective deferrals if the employer is willing to give participant's a sufficient "kicker" in exchange for the attachemt of an SRF to the amounts earned?

Nope I don't think so. It is virtually impossible after 409A to make such a deferral because the salary is already earned--it is too late to make a timely deferral and would be an invalid subsequent deferral. You would literally have to make an election to defer the same salary into both a 401(k) and a NQDC plan at the same time, which isn't possible in a supplemental plan and is conceptually impossible in separate plans. But even pre-409A, I believe there was a letter ruling that did not allow for further deferal since the amounts become taxable whan refunded. There are many who argued that this would be the perfect solution for HCE's, but it is a dream, not reality

I looked at the preamble pp 19255 and 19256 and I completely agree your scenario would work with little or no risk.

My feeling about that is that it could work but is aggressive in that there is some risk that the delay provisions you mention are there for situations that are unforeseen or out of the control of the employer and not meant to be "regularly" used in this situation. I suppose you could argue it is out of the control of the employer but in this case, it smacks of abuse. To me they are limited exceptions that should not be "overused". That is a different situation than for example, a payment that is scheduled to be made in 2010, and you can clearly wait until the end of the year. A parallel to your example I think would be to use a short term deferral plan that specifies payment within 2.5 months after the end of the vesting year, to instead pay on December 31, since there is "extra" time given when theplan specifies the time. I think the IRS would look at that repeated behavior as a violation. It's creative, but I don't think I'd advise an employer to do it unless they had no better alternative. I don't really understand the reluctance with setting a time frame to get the release done, unless some people are seeing it as an opportunity to further delay payment, as opposed to needing more time to negotiate a release. BTW the question I referred to was raised at the ALI ABA exective comp conference earlier this June at the Waldorf-Astoria

At the last ALI-ABA executive comp conference in NY Dan Hogans commented on this, but didn't say much other than that you are right in that paying benefits, without more, upon the signing of a release is not permissible under 409A. For example, it could result in a payment occuring more than 90 days after separation. FWIW, the way I would approach it is this: If I'm remembering correctly, the regulations talk about a 90 day window after separation of service as satisfying the rule, so you could design your plan to say, e.g., "payments shall begin no later than 90 days following separation from service (provided a properly executed release is received within 60 days of separation)" Therefore, presumably, you could give the employee a lot of time to sign the release, but not more than, say 60 days, since you need some time adminstratively after the release is signed to get him paid. If they don't sign the release they don't get paid. Seems like a good thing for employers. (small rant following) It's amazing how much leverage some employees have. If someone needs more than two or three months to sign a release something is wrong.

How is this any different from taking a typical bonus plan payable on March 15 and turning it into deferred compensation? Not that I would recommend it, but you just have to make sure you meet 409A. (small rant follows) It wouldn't be such a big deal if everyone weren't so spooked about 409A. The large law firms that sat on their thumbs for two years want an extra year to amend their clients plans. I'm not saying its easy to transition to the final regs, but I wonder how many of these lawyers got the ball rolling earlier than this year (almost three years after the legislation)

I forgot to mention about the earnings. There's not a whole lot of guidance, if you set the rate artificially high, the service would probably challenge, but as you say you will use a fund and that should be fine. As Harry O said, if the amounts are subject to SRF, there will be no further taxation of earnings after vesting, but earnings up until vesting are subject to FICA. If the amounts are immediately vested you can potentially have all earnings escape FICA tax--that is the beauty of the non duplication rule.

Yeah I see that now--I removed the double trigger discussion from my earlier post

I don't think it's that uncommon to see this design. A single trigger CIC payment is considered "extra" protection if the company changes hands, so it's not meant to be payment for normal severance. If the person's payment is not contingent on a CIC, it wouldn't be a golden parachute. I've never liked single triggers because it seems to me that you should only "deserve" the extra money if you involuntarily lose your job--under the single trigger design you get paid no matter what after CIC and you can voluntarily terminate after you get paid. Buying companies hate single triggers because executives can take the money and leave employment and thus it is harder to retain them as necessary throughout and after the change in control. The bottom line is that if you get it done by 12/31/07, you shouldn't have any 409A concerns at all.

(assuming this in an elective deferral account balance plan) The FICA regulations address this. There's a special timing rule and a non duplication rule. Under the special timing rule, if the deferrals are not subject to a substantial risk of forfeiture (elective deferrals would not be) they are subject to FICA/FUTA tax at the time of deferral, and under the non duplication rule, the subsequent earnings will not be FICA/FUTA taxed at any time including distribution. The rules are different for amounts subject to SRF or nonaccount balance plans. I'm sure others can explain it better, I hope that helps.

Even if the plan is subject to 409A, the transition rule should cover this change as long as a separation from service doesn't occur in 2007. Since it is impossible for us to determine whether or not your plan is a valid short term deferral, no one on the board would want attempt to answer your question other than to say that if the plan is a STD, then you would presumably be free at any time to turn it into a 409A plan without running afoul of any 409A rules (as long as you start it up right). However, based on the facts you gave, you should probably seek an opinion from counsel on whether the CIC payment is subject to a substantial risk of forfeiture such that the 2.5 month rule is applicable--but note that few attorneys will feel comfortable at this early stage opining on whether or not an event, such as a CIC, will succeed in creating a valid SRF and therefore you may not get the concrete answer you need. But assuming the plan isn't currenlty covered by 409A, what would make you think you couldn't turn the plan into deferred comp? You should maybe think about what you are trying you accomplish with this plan. Do you want a golden handcuff, is severance the main goal, retirement, etc.?

Along the lines of what Kodle is saying, the Treasury seems to be assuming that the "one" form of payment is in relation to one deferral, such as an employer's SERP benefit. There is no mention of the applicability of that rule to completely different benefits that have a totally different source or formula. Again the fact that all deferrals under all plans (of the same type) are treated as deferred under one plan does not mean you can't have separate deferrals with different legal terms attached to them. We had this discussion in relation separating payments under separation pay plans for purposes of the short term deferral rule. Why would you think the aggregation rule means you have to have all the same plan terms--it's a rule for applying failures, not for designing plans?

I'm not convinced yet that I'm completely wrong. I could be, but where in the regs does it say you can't have separate forms of payment for separate deferral amounts? Note the last sentence of the long excerpt below "The addition or deletion of such a different time and form of payment applicable to an existing deferral is subject to the subsequent deferral election rules and the anti-acceleration rules." That leads me to believe that where new and/or separate deferrals are involved, a participant could choose a different form of payment. But it seems that you still be limited to exceptions in the regulations. Anyway, the preamble says: The final regulations retain the rule, however, that permits a plan to provide for a different time and form of payment, depending upon whether the permissible payment event occurs before or after a specified date. In addition, the final regulations also provide for a limited ability to designate different times and forms of payment based upon the conditions under which a service provider’s separation from service occurs. 5. Different times and forms of payment on separation from service under specified circumstances The final regulations continue to provide that a time and form of payment must be specified with respect to each permissible payment event. Under the proposed regulations, a second time and form of payment could be established for a payment due to a permissible payment event where the distinction was based upon the event occurring before or after a certain date, such as the service provider reaching a certain age. Commentators requested that different times and forms of payment be permitted if based upon different types of separations from service. The final regulations generally provide that the time and form of payment upon a separation from service may vary depending upon either or both of the following: (1) whether the separation from service occurs during a limited period of time not to exceed two years following a change in control event as defined for purposes of section 409A; or (2) whether the separation from service occurs before or after a specified date (for example, the attainment of a specified age), or before or after a combination of a specified date and a specified period of service determined under a predetermined objective formula or pursuant to the method for crediting service under a qualified plan sponsored by the service recipient. The addition or deletion of such a different time and form of payment applicable to an existing deferral is subject to the subsequent deferral election rules and the anti-acceleration rules.

I've discussed similar strategies, I think your ideas work but the limitation that I see with that design is that you need to make 2 deferral elections. Depending on how your match (if you have one) is structured, since the NQDC plan can't accept deferrals until the 401(k) limit is reached, participants could end up losing out on match money in order to fill up the 401(k) faster. I haven't found any perfect solutions to this, that's why I think 409A is a bigger impediment to linked plans than others on the board have acknowledged. If a participant could only adjust their NQDC deferral percentages throughout out the year, these issues could be resolved (obviously that will never happen).

If there is a current legal right to payment at a CIC date, then there is an "amount deferred". Although I think there is more guidance needed on determining the "amount deferred", I'd assume the payment constitutes an "amount deferred" for now. It sounds as if you ought to have an attorney review this arrangement and make a recomendation for plan document compliance with 409A.

This makes me wonder if it would have been better, if practicable, for Congress to have "baked into" 409A the concept that a plan should have as its primary purpose, or at least a clear intent, to create deferred compensation--meaning an intended deferral of taxation. If there could be a rule to that effect, then the IRS could have authority to declare that some plans, even though they might fit the technical definition of deferred comp, simply aren't intended to defer compensation and thus should be exempted, such as teacher pay. I can think of other types of "sales incentive" compensation plans that seem to fit that category, such as gift card or points programs that allow a person to hold on to points and redeem them later. Even these innocuous, fairly insignificant (monetarily) plans, can fall under 409A. Such persons are not trying to defer taxation, but rather just waiting to redeem their points. There should be a away of exempting more plans from 409A based on intent and/or who the participants are. Of course this could also open up 409A to more complicated ERISA-like notions.

Looks like you have a good point; they failed to acknowledge that year 2 pay might not be deferred compensation-assuming the fiscal year is as in your example. IMHO this is just another example of an overbroad statute that kills the horse just to get to the fly. The idea of teachers spreading out their pay being deferred comp is a little ridiculous. I'll have to tell my mom that for 30 years she was in a deferred comp plan. Also, this provides another great reason to have just given us until the end of following year, then we could leave the poor teachers alone!

I thought the period you measure from for the STD rule in your example is from 12/31 of year 1. Assuming you are correct, isn't the problem that teachers have limited choices in the form in which they can receive their pay--meaning that they either get paid ratably over the school year or the full fiscal year; the school district would presumably not allow any other arrangement. Therefore, since some of the "stretched" payments will necessarily go beyond the STD period, the STD rule cannot be used. I doubt the IRS entertained the idea that a teacher could negotiate for an "accelerated" payment since the idea is for the teacher to have the money spread out so they don't have to "go without" a paycheck.

That's a good point, but my question was geared more toward what is the additional benefit of a VEBA where the employer "funds" the VEBA with insurance to pay the benefit? Self funded VEBAs are obviously very flexible, so why would you use insurance to pay benefits. Is it a cost/risk analysis?

I guess I'm confused as to why an employer would by insurance for a VEBA. I thought the point of the VEBA was to fund it to pay welfare benefits and get the immediate deduction with no tax to the employee. You can get that treatment buying insurance outside a VEBA-what's the VEBA for then?

Locust--I don't mean to suggest that your concerns aren't legitimate, I just think the IRS and Treasury have given us sufficient tools in these cases to "get around" otherwise problematic limitations. First, that "all deferrals of compensation . . . are treated as deferred under a single plan" does not mean that you can't bifurcate payments under that single plan. The concept of bifurcation is pretty well settled in various places of the regs, and is consistent with the concept of aggregating to a single plan. Payments, other than annuties, can be treated separately for various purposes, such as applying a different distribution event or, as here, applying the STD exception within the confines of a single plan or "aggregated plan." Second, when you have a STD, you do not have a "deferral of compensation", so you would not have to aggregate that payment, as you say, into the separation pay plan because an amount that is not a deferral of compensation is not by definition separation pay. Thus, if you bifurcate your payment properly you can make it independent of the separation pay plan by making it a STD. Without that "independence", I'd say you're right it can't be done. But the regulations and its authors provide support for it. jhall--Unless I'm missing something, the general language necessary to accomplish your goal should not be too difficult. It's the operation and administration that scares me. For example, you could say something like "to the extent the total severance benefit exceeds the lesser of (a) 2x prior year's pay or (b) 450,000, such excess amount shall be treated as a separate payment and shall be paid in full in the form of a lump sum or installments no later than March 15 of the year following the year of involuntary separation from employment. " The remaining 450,000 would be exempt from 409A, so the employer could retain it's discretion to pay that amount in any manner upon termination. Do you see reason why that wouldn't work?

I agree with jpod. I was agreeing with you jhall, I don't think you're being a worrywart on this one. Any amount that becomes payable in 2007 (for whatever reason) would have to be paid in 2007.

I assumed he was terminating. Why is the exec entitled to a payment or was there was a 409A failure? The preamble to the final regs states: "The final regulations provide that a right to a tax gross-up payment is a right to deferred compensation that satisfies the requirement of a fixed time and form of payment if the plan provides that the tax gross up payment will be made, and the payment is made, by the end of the service provider’s taxable year next following the service provider’s taxable year in which the related taxes are remitted to the taxing authority." In the 280G context, a gross up becomes a parachute payment itself subject to the excise tax. Based on the preamble language, I would not be surprized if the IRS were inclined to treat gross ups as a part of the deferred comp package and thus subject to the 6 month delay rule for specified employees who receive a distribution on separation from service. As a practical matter since a terminated specified employee wouldn't have any FIT liability until 6 months later when he receives his distribution, does it make sense to gross him up before 6 months anyway? Keep in mind that the reason an acceleration for FICA is pervasive is that FICA taxes become due on the later of performance of services or lapse of SRF. So you need special provisions to pay FICA early since it will always be due before distributions. But you don't really need special provisions to do a garden variety gross up, except to pay it timely, as Harry O says.