Carol V. Calhoun

This is only indirectly about 409A, but I'm looking for guidance when both section 83 and 409A apply to a plan. Has anyone thought about whether an employee can voluntarily delay the lapse of a substantial risk of forfeiture under section 83? Regulations under 409A and 457(f) deal with this issue, but I can find nothing under section 83. Example: Jane is given restricted stock as part of her compensation. She must forfeit the stock unless she remains with the employer for at least five years. She does not make an 83(b) election. When the end of the five-year period is nearing, she decides that she would rather take the risk of forfeiting the stock rather than paying the income tax right now. She therefore agrees with her employer that the stock will be forfeitable unless she remains with the employer for at least another two years beyond the five-year period originally provided for. Does this work to defer the taxation? Obviously, if you did this, you'd want also to comply with the 409A rules governing second deferrals, but I'm just trying to figure out whether it's even possible under section 83.

I know this is old, but the proposed 457 regulations deal with this issue. They allow elective deferrals only if the election meets all of the following requirements: The present value of the amount to be paid upon the lapse of the substantial risk of forfeiture must be materially (at least 25%) greater than the amount the employee otherwise would be paid in the absence of the substantial risk of forfeiture. The substantial risk of forfeiture must be based upon the future performance of substantial services or adherence to an agreement not to compete. It may not be based solely on the occurrence of other types of conditions (for example, a performance goal for the organization). However, if there is a sufficient service condition, the arrangement can also impose other conditions. For example, the substantial risk of forfeiture could continue until the later of two years or when a performance goal was met. The period for which substantial future services must be performed may not be less than two years (absent an intervening event such as death, disability, or involuntary severance from employment). The agreement subjecting the amount to a substantial risk of forfeiture must be made in writing before the beginning of the calendar year in which any services giving rise to the compensation are performed. Special rules apply to new employees (but not to employees who are newly eligible to participate in a plan). Prop. Treas. Reg. § 1.457-12(e)(2).

Has anyone thought about whether an employee can voluntarily delay the lapse of a substantial risk of forfeiture under section 83? Regulations under 409A and 457(f) deal with this issue, but I can find nothing under section 83. Example: Jane is given restricted stock as part of her compensation. She must forfeit the stock unless she remains with the employer for at least five years. She does not make an 83(b) election. When the end of the five-year period is nearing, she decides that she would rather take the risk of forfeiting the stock rather than paying the income tax right now. She therefore agrees with her employer that the stock will be forfeitable unless she remains with the employer for at least another two years beyond the five-year period originally provided for. Does this work to defer the taxation? Obviously, if you did this, you'd want also to comply with the 409A rules governing second deferrals, but I'm just trying to figure out whether it's even possible under section 83.

Okay, back to your original question. Yes, a "person" includes a corporation. So if the JOC has control of all of C, D, and E, it will be in a controlled group with all of them.

I don't think the irrevocable annuity option would work. A 457(b) for a nonprofit has to be unfunded. So unless the annuity was subject to the claims of the employer's general creditors, it would cause the plan to lose its 457(b) status. Why is the employer terminating the plan? There aren't a lot of administrative issues in just maintaining the plan--it's a top hat plan, so no ERISA filing obligations, etc., and it's unfunded, so the employer doesn't have to worry about being responsible for a trust. I'm wondering whether the employee could assert some kind of contractual right to have the deferrals continue, even if the Internal Revenue Code would permit termination. Or whether the employee could simply point out to the employer that termination would cause onerous tax consequences to him, which the employer could avoid at minimal inconvenience by continuing the plan.

One of the interesting things about 457 is that the "elective deferral" limits apply regardless of whether the contribution is in fact elective. Even leaving aside the catch-up, the 402(g) limits apply only to elective deferrals in 401(k) or 403(b) plans, but to all contributions to 457(b) plans. In most instances, this is a down side to 457 plans. (For example, an employer match gets counted against the limit.) But it does suggest that the catch-up can be used even for nonelective contributions--assuming, as Peter says, that you have checked state law and it does not create a problem.

But if C, D, and E are 501©(3)s, they shouldn't have stock. No part of their net earnings can inure to the benefit of shareholders, so stock ownership would be meaningless. For that reason, the controlled group rules with respect to 501©(3)s are based on things like interlocking boards of directors, not stock ownership. See Treas. Reg. § 1.414©-5.

Picked up contributions are treated as employer contributions. So they could not be the subject of an in-service refund until the earlier of age 62 or normal retirement age. Merely transferring from a collectively bargained position to one that is not collectively bargained, or ceasing to be covered by the plan, wouldn't help.

Umm, how does JOC "own" 501©(3)s? It's rather in the nature of a 501©(3) that it can't be owned.

Are these picked up contributions, or after-tax employee contributions?

There really hasn't been any guidance issued. All they've said is, "under current guidance, a reasonable, good faith interpretation standard applies with respect to governments. See Notice 89-23, 1989-1 C.B. 654, and Notice 96-64, 1996-2 C.B. 229, see §601.601(d)(2) of this chapter." Announcement 2011-79. (The announcement deals specifically with Indian Tribal governments, but seems to be applicable to governmental plans generally.) Personally, I'd be a bit wary of treating a city and a board of education for that city as separate employers, and thus treating the teacher as having had a termination of employment. But you know your client's risk tolerance better than I do.

Are you talking about a 401(a) plan or a 457 plan? This is in the 457 topic, but appears not to relate to a 457 plan. Since you say it's a non-ERISA plan, what kind of plan is it? Governmental? Church? We have forums for both governmental and church plans, so you might want to post in the appropriate one.

Does anyone have experience with what IRS will accept as a correction when participants were offered investment options that the plan document did not permit? Situation is that participants were allowed to self-direct their own accounts. The trust document specifically said that they could not self-direct to a limited partnership. The trustee nevertheless permitted participants to do this. The failure is probably not "significant," and even if it were, we're probably within the time for correcting a significant operational failure, so we should be able to use SCP. However, even under SCP, we're supposed to correct the failure. And we have no idea how to do this. IRS guidance says that amending the plan to retroactively cause it to reflect what was actually done is available only in three specific situations, none of which is this one. So presumably, we're supposed to retroactively take these people out of the limited partnerships. But how would we even do this? Presumably, they would argue that but for being allowed to invest in the limited partnerships, they would have invested in whatever, with 20/20 hindsight, has proved to be the most favorable option. But if the employer makes a contribution equal to the income they "lost" by not being in the most favorable option, that contribution would go to the most highly compensated employees (because they were the ones most likely to choose the limited partnership option), which doesn't sound right. But if we retroactively put them in the default option, I'm concerned with a 404© or other ERISA violation (not to mention, severely ticked off employees if that is less favorable than the limited partnerships). Any other options? Or has anyone had a failure that was significant enough and had gone on long enough that they had to go in under VCP, and thus gotten some IRS guidance on how to fix this?

Code section 414(k) provides for a combination DB/DC plan. However, I'm trying to figure out whether the DC portion can allow for discretionary contributions. What we're basically trying to do here is to have the contributions to the DC portion go up or down depending on what contributions to the DB portion are required. While I may be able to figure out a formula under which that would happen that does not involve employer discretion, it would be a lot easier just to allow for discretionary contributions. However, while 414(k) talks about a combined DB/DC plan, it does not explicitly provide for a combined pension/profit-sharing plan. (A combined DB/DC could be a DB/money purchase plan, which would still be entirely a pension plan.) For technical reasons, we don't want to have two separate plans. However, it seems to me that if the structure would be allowed in the case of separate plans, it doesn't make much sense to disallow it if the plans are combined. However, I'm particularly concerned because 414(x), which provides for combined DB/401(k) plans, is limited to small employers. I'm wondering whether the negative implication is that other employers can't have combined DB/profit-sharing plans. Has anyone seen any guidance, or had any experience, with this?

If your employer is not governmental, it is extremely unlikely that any plan to which it contributes would be a governmental plan. The only exceptions would be plans that primarily cover employees of governmental employers, but also cover certain entities with a strong connection to a governmental entity (e.g., a union representing governmental employees). Announcement 2011-78. If the employer contributing to the plan is an international organization which is exempt from taxation by reason of the International Organizations Immunities Act (59 Stat. 669), it is considered governmental. This basically covers entities like the World Bank, of which the United States and other governments are members. The Railroad Retirement program provides benefits to individuals who have spent a substantial portion of their career in railroad employment. The plan is treated as a governmental plan. But unless you have specifically been told that you are covered by the Railroad Retirement Act, this would not describe your plan. There is no central list of governmental plans. If there is any doubt whether your plan is a governmental plan, you'd have to ask your employer. If your employer says your plan is not governmental, and you want to challenge that, you'd have to look to Announcement 2011-78 for guidance.

I would agree with QDROphile. There is no need for a whole new plan, just because you are changing investment options, any more than you'd need to start a new plan if you changed investment options under a 401(k) plan. You can just continue the existing plan, but provide that new money will go into the new contracts.

As set forth in the 401(k) regulations, the employee needs to make the election by 4/1/2016. To the extent the plan provides a range, you could do one of two things. You could require an employee, as a condition of employment, to select an option. Or you could have the plan provide for a default option. The default option should be set forth in the plan, rather than just being part of an election form.

Yes, the limits are completely separate. https://www.irs.gov/Retirement-Plans/How-Much-Salary-Can-You-Defer-if-You%E2%80%99re-Eligible-for-More-than-One-Retirement-Plan

Yes, so long as the match is at a rate set forth in the plan, rather than at a rate subject to employer discretion. So if the plan states that there is a 50% match on employee contributions to the 457(b) up to 3% of compensation, you're fine. If the plan states that the employer can decide, in its discretion, whether to make matching contributions each year, you have a problem.

What do you mean by a variable employer match? If the match varies only with the size of the employee contributions, that is considered definitely determinable, because the benefit is not subject to employer discretion. However, if the employer can decide each year whether to make a match, or at what level the match will be, then this would not be appropriate for a NPP. The focus of the definitely determinable benefit rule is avoiding employer discretion over the amount of the benefit. Thus, either the benefit must be stated in the plan (defined benefit plan), or the employer contributions must be stated in the plan and earnings must be credited at actual plan earnings rates. The definitely determinable benefits rule does not preclude employee discretion affecting the amount of the benefit. After all, voluntary employee contributions always increase the size of the benefit. So long as the amount of the employer match is affected only by employee discretion as to the size of contributions, not employer discretion over the amount of the match, the plan satisfies the definitely determinable benefits rule.

The plan can define compensation any way it wants, for purposes of defining what a participant's election means. And in my experience, they typically define it to include the picked-up amounts as compensation, because most employees think of pick-ups as being mandatory employee contributions (even though for federal tax purposes, they are treated as employer contributions). Let's look at it this way: The person who makes $50,000, and whose pick-up is $2,000, could clearly contribute $5,000. If for some reason the IRS were to take the position that the plan's definition of compensation had to be $48,000, the person could simply defer 10.42% of compensation instead of 10%. Why would the IRS care whether the plan said that the person was treated as deferring 10% or 10.42% of compensation? Clearly, the maximum limit is no more than 100% of includible compensation, and includible compensation does not include pick-ups. But the 100% of includible compensation maximum limit is seldom relevant anyway. (It would apply only to someone whose compensation was less than $18,000, and few people with that level of compensation want to put the maximum into a 457 plan.) So what plans often do is to have a definition of compensation for purpose of determining deferrals that includes pick-ups, and a separate definition of includible compensation for purposes of determining the maximum which excludes pick-ups.

No, you do not. Treas. Reg. § 1.415©-1(a)(2)(i) specifies which contributions to defined contribution plan are treated as "annual additions" subject to 415©. They include only contributions to: Thus, a contribution to a 457(b) plan is not part of annual additions for purposes of section 415©.

The permission for governmental plans to self-correct is actually in the statute. The last sentence of section 457(b) states as follows: Thus, you can informally self-correct, without needing to follow the procedures of EPCRS.

I don't know that we even need to get as far as the regulations. 403(b)(1)© provides that in order to be a 403(b) annuity: Thus, to the extent that rights under the contract are subject to a vesting schedule, they are under 403© rather than 403(b). The regulations are of interest only to the extent that they provide that a contract can be bifurcated, so that the nonforfeitable portion is treated under 403(b) and the forfeitable portion is treated under 403©, rather than treating the whole thing as subject to 403© because a portion is forfeitable. 403© provides that benefits subject to that section are taxable under 83(b). And 83(b) has never required that benefits be fully vested upon termination of the plan. My sense is that the primary issue is contractual, rather than under the Internal Revenue Code. The plan by its terms presumably said that the amounts would vest on a particular schedule. If, for example, the plan calls for three-year cliff vesting, an employee who had one year of service at the date of termination, but who attained three years of service thereafter, could argue that his or her contractual rights were impaired if the benefits never vested. So if the plan were fully terminated, such that continued vesting was not possible, you would need to fully vest all employees. However, if the plan were merely frozen, such that employees could continue to vest, this would not be an issue.

So long as the election is a one-time election upon initial hire or first participation in any plan of the employer, they should be fine. The legal issues tend to arise when an employer adopts a new plan (having already had a plan before) or adopts a new contribution formula under an old plan, and wants to allow employees to make new elections at that time. Because such an election is not on initial hire or first participation in any plan of the employer, it cannot be the basis for a pick-up. I would point out that although a one-time election upon initial hire or first participation in any plan of the employer is permitted, it can often create employee relations issues. For example, an employee may elect a high rate of contributions upon hire, but later encounter financial reverses and want to lower the rate of contributions. This cannot be permitted. In some instances, we've seen employees resign and take other employment in order to escape the pick-up obligation and to obtain a distribution of the amounts previously contributed. Conversely, if an employee initially elects a low rate of contributions, but later wants to increase the rate of contributions to obtain a better benefit, any such increase can be allowed, if at all, only on an after-tax basis. Given that an individual may remain in employment for many decades, holding the 60-year-old to an election he or she made at 20 will often strike employees as unfair. And of course, both employees who want to raise their contributions and those who want to lower them may later argue that they did not fully understand the irrevocability of their initial elections. It is critical to ensure that communications with them are fully documented.