panther

No. Unvested amounts are not included in taxable income.

This is the rare case where the executive is not accepting anything in return for the reduction but is agreeing to it knowing the employer's financial limitations.

Employer wants to reduce the deferred compensation benefit paid at termination of employment from $2.5M to $2M? Is this permissible if we keep the same time and form of payment and the parties agree? The 409A regulations (26 CFR 1.409A-1(c)(3)(vi)) envision that it is permissible to increase the benefit but I do not see any express approval of reducing the benefit.

The company does not give the president a choice about the payments and they therefore fall outside of the cafeteria plan (that is my argument) so I do not think the IRC 125 cafeteria plan rules are triggered and that seems to be the consensus here. Thank you for the comments.

Employer pays the President's family coverage under group health insurance plan per an employment agreement. For other employees, employer only pays for employee-only coverage (employees pay for any more on their own. This clearly is discriminatory under IRC 105(h). But does it violate the IRC 125 cafeteria plan rule against discrimination as to contributions and benefits?

Company merged with Target and now wants to enter into new employment agreement with Target Executive. The current employment agreement offers $100k severance benefit upon Good Reason termination due to change in employment position, which will occur. To encourage Target Executive to stay, Company offers new employment agreement with $100k signing bonus and no severance benefit. Would this be a "substitution" under 409A and thus an impermissible change in the time of payment? I think not because under the current agreement he does not get the $100k unless he terminates, which he would not do if he signed the new agreement.

It would seem that an employer could do the 25% QNEC if the notice could go out within 45 days after making the corrective contribution but that is not the case. The Rev. Proc. says the correction involves 3 steps: (1) begin correct deferrals, (2) send a notice within 45 days thereafter and (3) make corrective contributions within 2 years. The notice is tied to when the correct deferrals start, not when the corrective contributions are made. So the IRS has boxed out employers who started correct deferrals and may not have been aware that doing so started the 45-day notice clock for prior mistakes (of which the employer may not even be aware). It makes no sense to say you get the 25% QNEC if you did nothing before correction and the 50% QNEC if you started correct deferrals more than 45 days before correcting. But it is what it is.

I agree with Belgarath. It seems to me that the notice would be sufficient if given within 45 days after the corrective contribution was made but that is technically not what the Revenue Procedure says. We have the same situation and are deciding what to do. The employer is cautious and likely will do the 50% QNEC just to be safe. Words matter.

See also 26 CFR 1.401-10(e)(1) (individual partner is not an employer who can establish a qualified plan, such as a SEP)

Thanks. I assume you base that on the rule in Treas. Reg. 1.408-7(f). That is helpful.

The Company sponsored a SEP with 2 participants. It turns out 1 participant provided no services to the Company and was ineligible to receive SEP contributions. Does that mean the other participant's SEP account could be disqualified?

This cannot be corrected as a document failure per Rev. Proc. 2008-50 -- VCP is not available yet to correct 403(b) plan document failures. The IRS expects to allow this when it updates EPCRS (See Notice 2009-3).

How could you use VCP to correct a 403(b) document failure? Rev. Proc. 2008-50 says VCP is not available for 403(b) document failures.

Rev. Proc. 2008-50 does not allow for correction of 403(b) plan document failures under VCP. The IRS is going to come out at some point with changes to the Rev. Proc. to allow more 403(b) corrections (See Notice 2009-3). Until then, there's no permitted way to correct 403(b) document failures from prior years.

Does anyone know where I can find a checklist showing required and optional provisions of a cafeteria plan document to review them for compliance with IRC 125?

See also, Siske, Roger, "IRS Voluntary Compliance Program" ALI-ABA (July 2002) re qualified plan corrections (internal buildup of income in group insurance annuity contracts or individual insurance annuity contracts is not included in the "Maximum Payment Amount" under Audit CAP -- cites IRC 72). Further thought -- If the sponsor were a tax-exempt corporation and the group annuity is deemed owned by a non-natural person and, per IRC 72(u), the annuity contract income is ordinary income to the policyholder, would there be any tax if the policy-holder is a tax-exempt organization? I would not think so.

Thanks.

A charity's president signed a vendor's "Plan Establishment Form" in 2008 thinking it was a 403(b) plan document. It was not -- it lacked the items required by 403(b) regs like eligibility and benefits description. So they had no plan document as of 12/31/09 as required. I know the IRS is coming up with a retroactive amendment correction program if sponsors adopt a new 403(b) prototype when that becomes effective but Announcement 2009-34 says that relief applies only to periods after 1/1/2010. The relief does not apply to the 2009 tax year (the first year when a plan document was required). So for the 2009 year, we had no document. I'm thinking the charity needs to go through VCP to correct the 2009 year. My question -- has anyone done this already?

Employer failed ADP test for 2002 and distributed excess deferrals to HCEs within 2-1/2 months after end of 2002. Because of a plan correction, the Employer had to re-run its ADP test and discovers it distributed out too much in corrective contributions to its HCEs in 2002. What is the correction method? The catchall overpayment provision in Section 6 of Rev. Proc. 2008-50 says the employer is to request the money back but if the employee does not refund it, then the money must be paid back into the plan by the employer if no one else pays. The Employer would just like to issue a 1099-R as to any un-reimbursed amounts so that the employ just pays 10% early distribution tax on un-reimbursed amounts.

Plan allowed excess contributions and failed the ADP test for 2002. It needs to distribute excess contributions but 2 HCEs due distributions are no longer employed and already rolled their funds over to an IRA. Is there anything the employer can do to correct the defect as to these 2 former employees?

A Corbel rep told me early this year that Corbel hopes to update their 457(b) plan document in 2008 sometime. That's all I've heard. I was told by Corbel that my tax-exempt 457(b) plan (adopted in 2004) need not be restated and that their most recent 457 tack-on amendment encompassing PPA and other law changes is all that I need.

The IRS EP division may have answered my question. I talked to a contact there on the phone who told me we could take a blank adoption agreement and fill it in based on memory and file that (along with basic plan document) through the VCP. He said the employer needs a plan document to go through VCP and apparently they will accept one reconstructed based on memory. The IRS guy said the IRS will treat the defect the same as a nonamender. I am not holding my breath on this one and won't make any promises to the client but we have no more options. If anyone has any other ideas or track record, let me know.

A small employer with 7 employees cannot find a copy of its profit sharing plan (adopted in 2004). Has anyone successfully corrected this type defect through the IRS Voluntary Correction Program? Rev. Proc. 2008-50 does not address it.