ERISA-Bubs

I should note: I don't think this falls within the correction procedure, since the definition is currently 409A compliant.

A client has a NQDC Plan that they wanted to be triggered by change in control. The change in control they were expecting is occurring, but we reviewed it and they drafted the change in control definition poorly (it's 409A compliance, but too narrow and it doesn't cover this transaction). So, the payment that was supposed to be triggered by this transaction isn't going to be triggered. They would like to do a corrective amendment to expand the definition of "change in control" to cover this transaction. Note: the transaction falls within a 409A-compliant definition, so that is not an issue, it just doesn't fall within the plan definition. I told them changing the definition would be an impermissible acceleration. Do you all agree, or is there some wiggle room here?

I know ISOs are exempt from 409A. In an ISO, you have to be an employee and you only have a limited time post-employment to exercise the ISO. Under 409A there are specific rules for what it means to have a termination of employment / separation from service. Is there a similar rule for an ISO? In other words, can a company continue to employ someone at a very low level (e.g. 10% of previous service level) and still let them vest/exercise the ISO during that period (i.e. treat them as still an employee)? I know under 409A, that would be a separation (below 20% previous service level), but I can't find any similar guideline for ISOs.

Thank you very much, Brian, for the quick and detailed answer!

We have an HSA where we make employer contributions at OE only. Accordingly, mid-year hires do not get employer contributions during their first year. I know employers have the ability to set their own contribution intervals (e.g. annually, monthly, etc.), so I think this is alright. But are there any issues with nondiscrimination or comparability rules?

My understanding is that we do not have to report Independent Contractor NQDC deferrals (Form 1099-Misc, line 12 -- the instructions say this is not required). However, payments to Independent Contractors under a NQDC Plan are to be reported in Box 1 in the year paid. This is how we've been handling this. The problem is we have an Independent Contractor who we paid NQDC to, and reported the payment on Form 1099. The SSA is now saying the reported payment disqualifies the Independent Contractor from Social Security Retirement Benefits. They are asking we correct this using Social Security Form SSA-131, but that form only appears to apply to employees (not independent contractors). I'm having a bit of trouble determining how to correct this. I'm also not finding straight forward information on whether we reported the payment correctly in the first place. Should Independent Contractor distributions from a NQDC plan be paid using Form 1099-Misc? The instructions are unclear, unless the payment violates 409A (in which case you use Box 15), but that is not the case here. I found some guidance that suggests we use Form 1099-NEC, Box 1, but the instructions for that form don't seem to support this, and I'm not sure it would have helped. Please help!

@EBECatty and @XTitan - I believe this situation is different. In the GLAM, the law firm is being paid fees from the client -- I see that as a service recipient (client) paying fees to a service provider (law firm). In our case, the law firm is being paid legal fees by the opposing party. The law firm did not provide any services to the opposing party. In the GLAM it provides that if the arrangement is a nonqualified deferred compensation (NQDC) plan, it fails 409A. In our case, since it is not a service provider/service recipient relationship, I don't think it would constitute NQDC under 409A. Please let me know if you think I'm mistaken. Assuming I'm right, can it be a NQDC arrangement that isn't governed by 409A? If so, can we include alternate payment triggers that are not 409A compliant (so long as we satisfy, say, the "constructive receipt" doctrine)?

Yes. Without asking the client, I assume they wouldn't be looking at NQDC arrangements as a potential vehicle if the amounts were not taxable.

We have a situation where a client has won a judgment against a defendant. Instead of taking the settlement money directly, the client would like the defendant to fund a NQDC Plan. Because the client is not a service provider to the defendant, I don't think 409A applies. Is that accurate? If so, what, then, governs the NQDC Plan? Is this based entirely on the "constructive receipt" doctrine? Do we still have to follow the 409A restrictions regarding distribution events, or can we be a bit more creative (e.g. if the client has a "down year" where their profits are below $____ it would trigger a payment)? I appreciate any advice, even if it is just spit-balling.

Yes, that is exactly what I was looking for. For anyone reading this, the above says that a participant cannot elect to defer any portion of the performance-based compensation once that amount has become "readily ascertainable" (i.e. once the amount is calculable and substantially certain to be paid). Thanks EBECatty!

Does it matter if performance-based compensation is substantially certain to be paid at the time of the deferral election? I know the regulations only state that it cannot be considered performance-based compensation if the performance criteria are substantially certain to be met at the time the criteria is established. Does it matter if the criteria is substantially certain be met at the time of the election? For example, if the criteria is not substantially certain to be met at the time the criteria is established, but all the criteria is met by the time the election is made (i.e. 6 months prior to the end of the performance period), is the compensation still performance-based at that time? I could swear I saw something about this in the past, but now I'm only seeing guidance talking about the time the criteria is set, not about the time of the election. Thanks in advance!

Worth asking -- what if these are small amounts? Is the IRS really going to make a participant's entire benefit subject to a 20% excise tax just because the earnings calculation was off by $20 and it is too late to use the 2008-113 correction procedure?

This is for a 457(f) Plan. We made several payouts, but miscalculated earnings which resulted in underpayments. As you would expect from a 457(f) Plan, vesting and payment occurred the same year, so FICA and income tax would have all been applied in the year of distribution. Some of the underpayments occurred in the last year or two and we could, potentially, correct under 2008-113. But some are older. For those we correct under 2008-113, the correction is pretty clear. For those that we cannot, what are our options? We prefer not to report the underpayments as 409A violations because that would cause major issues for the affected participants, when the miscalculations are not major (at least not in relation to total benefits for these participants). Can we just correct past W-2s and leave it at that? Can we make up the underpayments and then issue 1099s in the current year? Any help is much appreciated. If I'm missing any relevant information, please let me know.

For a QDRO distribution to a minor/dependent, the Participant is responsible for paying the taxes on the distribution. By default, the Plan Administrator will increase the QDRO distribution by 10% as a tax withholding. However, we also give the Participant the option of foregoing the additional 10% distribution as tax withholding by filling out a Form W-4R, in which case the Participant is responsible for the taxes outside the Plan. We had a participant request to have the QDRO distribution increased by 25% as a tax withholding. Is this allowed?

Probably not a bad idea to reiterate the unfunded nature of the benefit and the fact that the employee doesn't own any money or investments in the plan, nor does the employer even have to actually make any elected investments.