Blackbirch

See 318(a)(5)©... 318(a)(2) and 318(a)(3) are only used to treat actual ownership by one party as attributed ownership of the other; it can't can't chain together attributions. (Which is good, as that would send your head spinning.) Ultimately, I think your chain of custody looks like this: Spouse as attributed owner as spouse of X via 318(a)(1) Spouse as attributed owner as beneficiary of estate via 318(a)(2) Spouse as attributed owner as beneficiary of marital trust via 318(a)(2) Spouse as actual owner. So, no; I don't see any change in ownership.

Beyond the 409A and reporting issues, I'd also be concerned about whether the other entity would be able to deduct the cost of the payment. is it deductible compensation if the recipient has never performed any services for you?

Another route would be set up discrete agreements each time there's a transaction that you think warrants it. In other words, today, there's either no agreement in place, or one that uses only a compliant CIC definition (triggering on the first 60% transaction in your example). At this point, the employee is entitled to nothing with respect to any subsequent transaction. Later, upon the 40% transaction, the employer decides if it want's to make an additional award to the employee based on this subsequent transaction. At that time, the distribution event is a 409A-compliant stated date rather than a non-409A-compliant CIC event. The challenge is not establishing a right to the 2nd benefit in advance of the transaction. Any written policy to that effect may be viewed as creating such a right and, thus, non-compliant deferred comp.

I now have my regs in front of me. I'm looking at 1.409A-3(f), the key provisions of which are, IMHO: Except as otherwise provided under these regulations, the payment of an amount as a substitute for a payment of deferred compensation will be treated as a payment of the deferred compensation. and Even where there is no explicit reduction or offset, the payment of an amount or creation of a new right to a payment proximate to the purported forfeiture or voluntary relinquishment of a right to deferred compensation is presumed to be a substitute for the deferred compensation.

I have to agree. Simplify the question by eliminating the CIC (which I understand doesn't help your underlying 280G question). What you're left with is the direct replacement of deferred compensation with a current payment. This differs somewhat from the traditional notions of acceleration because it requires employer consent (as opposed to occurring upon employee election), but I don't see the anti-acceleration rules making a distinction based on whether the employer consents. If such a "reduce and replace" technique were permissible, much of the 409A rules would be inoperative. In that case, all plans would be designed to push both vesting and distribution out as far as possible with the understanding that both could be accelerated at the employer's whim, giving the parties the exact control and flexibility that 409A is designed to deny them. I also seem to recall something in the regs that would treat any such replacement payments/agreements as part of the same plan, making the impermissible acceleration all that much more naked, but I don't have my regs in front of me.

Nice to see all the interest! Ultimately, there were too many issues for my client and they decided not to go forward, but here are some thoughts. Short-Term Deferral: One proposal was to rely exclusively on the short-term deferrals. In this case, benefits would be paid only to those who were actively employed at the time of the carry payment. This creates an ongoing service requirement, and you're in STD land as long as the plan pays out quickly enough. I think this would work provided you're willing to cut participants off entirely upon termination. Does Vesting on Death/Disability blow STD?: One of the desired feature full vesting upon death or disability. In this case, the participant would be entitled to payments for the life of the underlying investment/fund that the award was tied to. You lose the ongoing service requirement, but there was a thought that perhaps you're still STD because the benefit is contingent on there being a carry payment, which isn't a given. I think this works in theory, but it relies on the likelihood of the payment being made. Ultimately we couldn't get comfortable that, as a factual matter, the likelihood of there being NO payment was high enough to say there was no deferred comp. How does "Paid upon Carry Payment" satisfy the 409A distribution timing rules? Assuming away the short-term deferral exception, the concern was that the payment here wasn't specific enough to satisfy the 1.409A-3 regs. Here, i think there are two decent arguments you can make. The first is that this falls with in the rule for "payment schedules determined by timing of payments received by the service recipient" under 1.409A-3(i)(1)(iii). The hiccup here is that the reg has caveats for individuals who may have some influence over the timing of such payments, so there's a factual hurdle you'd have to clear, here. The other approach would be to use the carry payment as an accrual event instead of a distribution. Here, each carry payment triggers a credit to the participant's plan account. Then, there are annual distributions at 12/31 that liquidate any current balance (similar to the original payroll-based distribution date).

I'm having a disagreement with a colleague about a proposed 409A design and wanted some feedback from the forums. Background A private equity firm has proposed a "phantom carry" plan for its non-partner employees. The firm creates funds which invest in companies over the course of, for example, 15 years. Periodically, the fund will pay earnings of those companies out to investors. The payment of these earnings is "carry." Proposed Plan Design An employee is granted a phantom ownership interest in a specified fund managed by the partnership. As with phantom stock, this is not an actual ownership interest and does not dilute the ownership interests of actual owners. Rather, each time the fund pays carry to its investors, the firm pays an amount to the employee equal to what the carry payment would have been for that employee had their ownership interest been real. The firm would pay cash in the next semi-monthly payroll cycle, and there would be no further deferral. The employee's entitlement extends for the life of the fund; potentially beyond termination of employment. Is there Deferred Compensation? As a threshold question, we must ask if there was any deferred comp. When are the amounts earned. If the employee is entitled to nothing until the payment of carry, then there would be no deferred comp as amounts are paid out immediately thereafter. However, if we say that it's the grant of the phantom carry rights that creates the entitlement, then subsequent payment of benefits for years down the road would certainly be deferred compensation subject to 409A. I think we're OK on our end saying it's the latter, but wanted to float this in case anybody felt strongly that there was no deferred comp. Is the Payment Scheme 409A-compliant? Alternate Arguments: No, it is not compliant. In this case, the payment of carry out of the fund triggers payment of NQDC to the participant. Such an event is not a permissible distribution event under 409A. Yes, it is compliant. Each semi-monthly payroll cycle is a stated date, which is a permissible distribution event under 409A. On most of these dates, there is a zero balance in the account, thus no distribution. Following each payment of carry, the NQDC account has a balance which survives only until the next scheduled distribution date (the semi-monthly payroll). Any thoughts/feedback? Thanks.

1.401(m)-3(j)(1) -- Contributions taken into account. A contribution is taken into account for purposes of this section for a plan year under the same rules as 1.401(k)-3(h)(1). 1.401(k)-3(h)(1) -- Contributions taken into account. A contribution is taken into account for purposes of this section for a plan year if and only if the contribution would be taken into account for such plan year under the rules of §1.401(k)-2(a) or 1.401(m)-2(a). Thus, for example, a safe harbor matching contribution must be made within 12 months of the end of the plan year. Similarly, an elective contribution that would be taken into account for a plan year under §1.401(k)-2(a)(4)(i)(B)(2) must be taken into account for such plan year for purposes of this section, even if the compensation would have been received after the close of the plan year.A contribution is taken into account for purposes of this section for a plan year if and only if the contribution would be taken into account for such plan year under the rules of §1.401(k)-2(a) or 1.401(m)-2(a). Thus, for example, a safe harbor matching contribution must be made within 12 months of the end of the plan year. Similarly, an elective contribution that would be taken into account for a plan year under §1.401(k)-2(a)(4)(i)(B)(2) must be taken into account for such plan year for purposes of this section, even if the compensation would have been received after the close of the plan year. We've been fighting over a couple different way to read this. 1. Because the language is written in the context of "for a plan year," this is only a timing rule. (Which would make sense, seeing as how we already have plenty of design limitations built into 1.401(m)-3.) This is supported by the fact that the two examples given in 1.401(k)-3(h)(1) are both timing rules. 2. "Taken into account" in this context means "exempted from testing." (edit: to clarify, the full amount of the proposed 200% of 3% would be treated as a permissible safe harbor contribution for both ADP/ACP purposes, but disproportionate portion would not enjoy the exemption from testing. Similar to a safe harbor match that matches deferrals beyond 6%.) The consequence would be that although the disproportionate matching rules would apply, because only NHCE contributions are disproportionate, this tested portion would automatically pass. Thus, the disproportionate match rules have no practical impact on safe harbor plans. 3. "Taken into account" in this context means "may be part of a safe harbor matching contribution." Because only NHCE contributions would be affected, in the case of a 200% match on 3%, the effect would be to reduce the NHCE safe harbor match to 200% of 2.5% (maxing out at 5% of comp), while HCE match remains at 200% of 3%. In this case, because HCEs would have the "superior" formula, the plan would not satisfy one of the basic precepts of an enhanced safe harbor match design (1.401(m)-3(d)(4)). Such a reading would effectively prohibit safe harbor designs that could lead to a disproportionate match. Thanks again for your thoughts.

Yes; I understand we're looking at the ACP testing rules, and that these generally wouldn't apply in the case of a Safe Harbor plan. However, the concern is that the Safe Harbor rules incorporate the 1.401(m)-2 ACP rules at 1.401(m)-3(j). The question becomes what meaning to give that incorporation. As for the representative match approach, the concern I have is that we're working with a client with a very small plan that may have fewer than 5 NHCEs in any given year. If we're subject to the disproportionate match rules, I'd hate set up a safe harbor design that may fail depending on the deferral elections of only a couple of employees. Thanks everybody for your thoughts. I think it's safe to say that we haven't heard from anybody who has heard of subjecting safe harbor designs to the disproportionate match rules.

A colleague of mine and I are disagreeing over a plan's ability to provide a disproportionate match as a Safe Harbor contribution. A disproportionate match, defined at 1.401(m)-2(a)(5)(ii), occurs, generally, where an NHCE receives a match that is greater than both (a) 100% of deferrals and (b) 5% of compensation. So, for example, a match of 200% up to 3% of comp would be fine until you defer past 2.5% of comp (at which point the contribution exceeds 5%). Generally, the consequence is that the disproportionate portion is ignored for testing purposes. Because only NHCE amounts can be disproportionate, it's meant to prevent trying to game the ADP/ACP test with weird matches. Here's the issue: In defining a safe harbor match, 1.401(m)-3(j) says the contribution will only be taken into account if it meets 1.401(k)-3(h)(1), which, in turn, says the contribution needs to meet the requirements of 1.401(m)-2(a), which of course includes our friend the disproportionate match rules. The implication, then, is that you couldn't have a safe harbor matching formula that could produce a disproportionate match. However, there doesn't seem to be any other support such a position. There's been no guidance that I can find on the interplay one way or the other. In all the articles/resources on permissible safe harbor matching formulas, nobody's mentioned the disproportionate match rules as an issue. Further, in laying out proposed safe harbor matching contributions, a number of the big-name providers have included formulas which would run afoul of the disproportionate match rules. Of course, none address the issue explicitly. Has anybody ever heard of this analysis? Have you dealt with safe harbor formulas that may trigger disproportionate matching contributions?

Thanks, John. I was afraid of that. Your experience squares with what I've heard from others around the office. There's nothing special/unique about the filing that I would expect to cause a delay. It's not an ESOP, there's no VCP, it's not a church/gov't plan... just a straight-up safe harbor 401(k)/401(m). One thought I had is that they may be confused by the filing date. Although sent on 1/31, it was received by the IRS on 2/1, so it's conceivable that it was bumped to the off-cycle pile. But again, that doesn't explain why it's being treated differently than the rest of the filings that were sent at the same time.

In light of recent revelations concerning IRS practices over the past few years, I can't help but think I may have a client that's been similarly targeted. It's a Cycle E plan that was filed on the last day of the cycle (1/31/11). I've checked in with the IRS a few times to check on the status, and the last time I did so (early April, 2013), the plan still had not even been assigned to an agent for review. It's an on-cycle filing that's been sitting on a shelf for more than two years, and nobody's even looked at it yet. When I called, the agent I spoke with explained that this was just their normal timing and it wasn't unusual. I understand their queue is pretty backed up, and I get that filing on the last day isn't the best way to get a quick determination letter, but this still didn't sound right; particularly since the filing in question was sent in the same folder as half a dozen other filings; all of which have received letters at this point (some in less than a year from the filing date). I've yet to find an explanation for why plans are being treated so differently. But before I get too paranoid, I wanted to see what others' experiences have been. 1) Does anybody else have on-cycle Cycle E filings that have yet to be assigned to an agent? 2) Is there any non-tinfoil hat reason a Cycle E plan would be unassigned for so long? 3) Have you been getting letters on Cycle A plans, yet? 4) Has anybody else had clients with multiple filings that were treated this disparately? Any input/feedback would be most appreciated.

A terminated DB plan is winding up and making it's final distributions, and the sponsor expects there to be a chunk of cash remaining once all expenses and benefits have been paid. Currently, the plan provides that any remaining assets will be paid to a group of current and former participants that we don't have the records/information to identify based on an allocation formula that we don't have the records/information to apply. The population/formula is fixed and knowable in theory, we're just lacking the necessary records. We're looking for a way out. Obviously, amending the plan to provide for a reversion to the employer isn't an option. If we went that route, the provision wouldn't be effective until 2015. Alternatively, I'm wondering if we can amend the existing provision to instead provide the surplus assets to a knowable group of participants based on a knowable allocation formula. By changing this provision, anybody in the original group could likely go form getting something to getting nothing. When it comes to qualified plans, that sort of thing gives me the willies. If this were an ongoing plan that was silent on the disposition of surplus assets upon plan termination, the default operation would allocate any surplus assets to participants. If that ongoing plan were amended to provide for reversion to the employer, I can't imagine any issue (aside from the five-year delay). Even though the participants have lost something in the abstract, you wouldn't say there was a cutback or that accrued benefits were affected in anyway. Until the checks are cut, does that approach ever change? Does the position change if an event occurs that allows us to identify, concretely, the participants that would be entitled to receive surplus assets? Does the position change once the plan actually terminates? Does the position change once the final benefit distribution is made, and the amount of surplus assets are known? At the end of the day, we're just looking for a method to allocate the surplus that we can actually administer. The easiest solution would be to amend the plan to provide an alternate allocation section to replace the existing one. However in doing so, I want to make sure we're not negatively affecting any current or former participants impermissibly. Any thoughts?

Still confused. The participant's already made whole. In the process of making the deemed distribution, the participant's individual debt is forgiven, and his account balance is similarly reduced. If the plan went after the additional security, what would they do with the spare $1,000? Restore the account balance (windfall for participant)? Credit it to a suspense account to offset future ER contributions? Host a cocktail party? I've got the legislative history lying around here somewhere... I was just hoping somebody knew offhand. What can I say? It bugs me when things don't make sense. Thanks again for your insights/patience.

Thanks for the discussion, guys. Quick follow-up... Operationally, what's the point of securing a participant loan? Assume: 12K account balance 7K loan You're saying this would require 2K in outside security (excess of 7K loan over 5K remaining account balance). What would be the point? When would that 2k ever be called? In the even of an default, wouldn't you just treat the unpaid balance (assume the full 7K in our case) as a deemed distribution and adjust the account balance to 5K? (Don't be scared; I'm not administering participant loans!)