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.

We are a tax-exempt entity ("A"), merging with another tax-exempt entity ("B"). Both A and B have 457(b) Plans. We are concerned the merger will trigger distributions under B's 457(b) Plan. The B Plan provides for distribution upon Severance from Employment. According to the regulations, a severance occurs when the participant has a severance from employment with the eligible employer. Eligible employer is defined as the tax-exempt entity that establishes the Plan. Can A just take over the B Plan and treat it as if no severance occurred? A did not "establish" the plan, so maybe not? What are our options here? Thank you.

We have a retiring executive in our NQ Plan (subject to 409A) and we have no record of his distribution election. We know how much we owe him, just not the time and form of payment. We don't want to allow the executive to make a new election now, for obvious reasons. Our solution is to pay under the Plan's default rules. We know this is not perfect, but we don't have another option. In addition, we are going to allow the participant (if he wants to) to sign an affidavit that confirms (1) my actual election was _____, (2) that election was made timely under the 409A rules (i.e. prior to the year the amount in question was deferred), and (3) in the even the IRS finds this affidavit (and payment thereunder) violates 409A, the company is not responsible for any adverse tax effects. Obviously, this is a bad situation and no solution is perfect. Has anyone else run into this and/or do you have a better solution?

It's a client. There is no notice number or penalty amount listed -- the DOL pointed out that we missed several Form 5500 filings, but they weren't looking into 5500 filings at the time. The DOL issued a Closing Letter that basically said, "our issue is resolved, but be advised you have missed 5500 filings and this letter doesn't resolve that issue." Since the DFVCP rules provides that DFVCP can only be used "prior to the date on which the administrator is notified in writing by the Department of Labor (Department) of a failure to file a timely annual report under Title I of the Employee Retirement Security Act of 1974 (ERISA)" and we have been notified, I assume we are not eligible.

Client missed filing Form 5500 SF in 2019, 2020, 2021, and 2022. According to the DOL's current penalty of $2,670 per day, the total penalty could come out to over $7m -- the IRS penalties would be almost $500k. We can't use the VFCP (at least not without permission) because we've already been told by the DOL that we are delinquent. This is not a big plan. A $7m penalty would be WAY more than the plan is even worth. What should our expectation be?

Unfortunately, I don't have a definitive answer for you. Since you haven't received a response yet, though, I can brainstorm with you a little bit. I do agree the 30-day rule for "First year of eligibility" applies here. So long as the participant is newly eligible, (s)he should have 30 days from initial eligibility to make the election. If (per your example) the participant makes the election within 30 days of becoming eligible on March 1, it should apply to everything after that. Even though the "First year of eligibility" rule talks about "deferral election," the regulations provide that "an election to defer includes an election as to the time of payment" (i.e. distribution election). The only question in my mind is the language in the regulation that provides that the 30-day rule only applies as to "compensation paid for services to be performed after the election." Back to your example, there is a $5,000 discretionary contribution on November 1 -- when was the discretionary contribution earned (i.e. when were the services performed for the contribution)? I think it is fair to say it can't be from before March 1, since a plan contribution isn't likely to be earned before participation in the plan. But, the IRS could find the contribution relates to services performed starting March 1 -- if the election wasn't made until March 31, some of the discretionary contribution could, arguably, have been earned before the election (so any portion of the discretionary contribution from March 1 - March 31 would be subject to the default distribution provisions of the plan). This is the potential issue I see. I don't think it makes a lot of sense for the IRS to apply the 30-day rule to distribution elections pursuant to the previous paragraph, but the IRS doesn't always make sense. I can see a few ways around this, just to be safe. Have the newly eligible employee make his/her election before becoming officially eligible Make a rule that a person does not become eligible until he/she makes his/her election. Make it clear somehow that the November 1 discretionary contribution is earned on November 1, and not for any previous time period.

Situation 1 was actually addressed here: https://www.tax.gov/ClarifyingTheUniversalAvailabilityAndOther403bRetirementPlanRequirementsOct272016/ Listen to questions 3 and 4, they deal with the same situation: A full time employee terminates and is rehired under 20hr/week, which is excluded under the Plan. According to the IRS, that person should not be allowed to defer after rehire if they fall into the 20hr/week category (i.e. they are expected to work less than 20hr/week). My commentary: The situation is tricky. You must exclude the employee, otherwise you blow the "less than 20hr/week" rule and then have to include everyone else in that category. However, situation 2 is different -- you must INCLUDE the employee under "once-in-always-in." And, further, if the person terminates and is rehired at under 20hr/week, but there was a plan when the person was terminated to rehire her later, you are looking at situation 2 (and the person must be included). The problem is, if you mess up the rule, you have a bigger problem than you started with. Also, with the "long-term-part-time" rule coming out, the "less than 20hr/week" rule probably loses a lot of its value.

I don't know that there is any guidance on point (other than the guidance you point out from Treas. Reg. 1.409A-2(j)(1)), but the scenarios appear to be the same and both permitted under the referenced guidance. In both scenarios, the event triggering payment is the separation from service. Under the second scenario, turning 55 or turning 60 doesn't trigger payment, it is just a condition for whether the participant is entitled to any payment when the triggering event occurs (i.e. the separation). Since payment is only made in the event of a separation, there is no acceleration because the payment will never be made before separation. The only change is that an earlier separation is now entitled to payment. This is exactly the same as accelerating vesting but not payment.

Paul - In other words (and assuming the 50% QNEC is the right correction), I need to wait for the 2023 Plan Year to end and testing to be completed before I can make the correction -- correct?

We are correcting a missed opportunity to defer for 2023. We owe the employee a QNEC based on 50% of the ADP for the employee's group (NHCE) multiplied by the employee's compensation. The problem is, we don't know the ADP for 2023 yet. We'd like to correct immediately. Is there another way to determine the missed deferral opportunity, or do we just wait until the Plan Year closes out to correct? I know it's nearly the end of the year, but there has to be some alternative (e.g. a situation where we are trying to correct mid-year, rather than in December) other than waiting until the Plan Year's ADP is known -- right?

This is in relation to a 403(b) Plan. We have an individual who was an employee and a participant in the Plan. The individual had a termination of employment, at which time the individual was eligible for a distribution under the terms of the Plan. The individual never took a distribution, but has since been re-hired by the employer, but in a position that is not eligible for Plan participation. Since the individual is now an employee, is the individual no longer eligible for a distribution by virtue of his earlier termination (note: the individual is not eligible for an in-service distribution, so that issue is off the table)? Would it matter if the individual were re-hired in a position classified or treated as an independent contractor or nonemployee? I realize the terms of the Plan will control a lot of the above, but I'm looking for more general guidance as to how this normally works or if there are any legal requirements that control, regardless of Plan terms. Thanks to all!