Everett Moreland

I would check whether federal tax laws allows the plan to make an in-service distribution of mandatory employee contributions before normal retirement age, even with the participant's consent. I know that voluntary contributions can be distributed in-service before normal retirement age, but I suspect (without knowing) that mandatory employee contributions cannot be.

J Simmons: The IRS guidance could be read to make that implication. Perhaps with too much optimism, you could also read the IRS statement at 72 Federal Register 19234 about coordinating guidance under 409A with guidance under 451, 125, and 457 as indicating that IRS guidance under 409A will follow the 457 regulations as to whether a bona fide leave plan can include a provision allowing leave to be cashed out. My perspective might be skewed from familiarity with governmental leave plans that allow leave to be cashed out, but I think the IRS would have given some warning if a leave plan by a taxable employer could not include a reasonable cash-out provision without complying with 409A. I've worked on the assumption that a reasonable leave cash-out provision need not comply with 409A. If I'm wrong I want to know.

Below is some relevant IRS guidance: 72 Federal Register at 19234: "Several commentators requested clarification of when a leave program will be treated as a bona fide sick leave or vacation leave plan for purposes of section 409A. Another commentator requested a clarification of the definition of a compensatory time plan. Because the definitions of these terms may raise issues and require coordination with the provisions of section 451, section 125, and, with respect to certain taxpayers, section 457, the final regulations do not address these issues. "Notice 2005–1, Q&A–6 provides that, until further guidance, taxpayers whose participation in a nonqualified deferred compensation plan would be subject to section 457(f) may rely on the definitions of bona fide vacation leave, sick leave, compensatory time, disability pay, or death benefit plan applicable for purposes of section 457(f) as also being applicable for purposes of section 409A. Until further guidance, such taxpayers may continue to rely on such definitions for purposes of section 409A." 72 Federal Register at 19275: "Notice 2005–1, 2005–1 CB 274, is obsoleted for taxable years beginning on or after January 1, 2008, except for the following sections of the guidance which remain effective as modified by any other applicable guidance: Q&A–6 (application to arrangements covered by section 457) . . . ." Notice 2007–86, Section 4: "Notice 2005–1 is obsoleted only for taxable years beginning on or after January 1, 2009, except for the following sections of Notice 2005–1, which remain effective after that date as modified by any other applicable guidance: Q&A–6 (application to arrangements covered by section 457) . . . ." Notice 2005-1, Q&A-6: "Further, pending additional guidance, State and local government and tax exempt entities may rely on the definitions of bona fide vacation leave, sick leave, compensatory time, disability pay, and death benefit plans for purposes of § 457(f) as applicable for purposes of applying § 409A to nonqualified deferred compensation plans under § 457(f)."

IRC Section 409A does not apply if "the plan provides bona fide vacation leave, sick leave, [or] compensatory time". 1.409A-1(a)(5). IRC Section 457(e)(11)(A)(i) similarly treats "Any bona fide vacation leave, sick leave, [or] compensatory time . . . plan" as not deferring compensation. The examples at 1.457-4(d)(1) indicate that at least some sick leave and vacation leave plans allowing accumulated leave to be cashed out provide bona fide leave. The IRS CPE publication here http://www.irs.gov/pub/irs-tege/chap601.pdf discusses (without much help) whether a leave plan is bona fide.

This can be corrected by filing with the IRS under Revenue Procedure 2006-27, 2006-22 I.R.B. 945, at the following link: ftp://ftp.irs.gov/pub/irs-irbs/irb06-22.pdf Search RP 2006-27 for "nonamender".

457(b) allows a participant to make elective contributions past the participant's normal retirement age, whether or not the participant has made catch-up contributions during the participant's last 3 taxable years ending before the participant's normal retirement age. See the following 1.457-4©(3)(v) as to whether normal retirement age can be lowered to 55: (v) Normal retirement age.(A) General rule. For purposes of the special section 457 catch-up in this paragraph ©(3), a plan must specify the normal retirement age under the plan. A plan may define normal retirement age as any age that is on or after the earlier of age 65 or the age at which participants have the right to retire and receive, under the basic defined benefit pension plan of the State or tax-exempt entity (or a money purchase pension plan in which the participant also participates if the participant is not eligible to participate in a defined benefit plan), immediate retirement benefits without actuarial or similar reduction because of retirement before some later specified age, and that is not later than age 70-1/2. Alternatively, a plan may provide that a participant is allowed to designate a normal retirement age within these ages. For purposes of the special section 457 catch-up in this paragraph ©(3), an entity sponsoring more than one eligible plan may not permit a participant to have more than one normal retirement age under the eligible plans it sponsors. (B) Special rule for eligible plans of qualified police or firefighters. An eligible plan with participants that include qualified police or firefighters as defined under section 415(b)(2)(H)(ii)(I) may designate a normal retirement age for such qualified police or firefighters that is earlier than the earliest normal retirement age designated under the general rule of paragraph ©(3)(i)(A) of this section, but in no event may the normal retirement age be earlier than age 40. Alternatively, a plan may allow a qualified police or firefighter participant to designate a normal retirement age that is between age 40 and age 70-1/2.

I agree with KJohnson's implicit recommendation that the agreement comply with one of the options at 1.409A-3(i)(1)(ii) and (iii). Although the final 409A regulations and preamble don't (at least in my reading) answer the question whether collection of receivables is a "condition related to a purpose of the compensation" within the meaning of 1.409A-1(d)(1), I think it's too risky to draft on the assumption that collection is a condition.

The guidance referred to by Steelerfan is the following from 72 Federal Register at 19274, as modified by Notice 2007-86, section 3.02(A): "B. Requirement To Amend Plans on or Before December 31, 2008 "Where there have been deferrals of compensation under a plan as of January 1, 2009 but the deferred compensation has not been paid, the plan must be made compliant with section 409A on or before December 31, 2008, with respect to such deferred compensation. These amendments are required only to bring the document into compliance effective January 1, 2009, and are not required to reflect any amendments made or actions taken under the transition rules to the extent such amendments or actions do not affect the plan's compliance with section 409A and these regulations for periods on or after January 1, 2009. For example, if a plan contains a haircut provision permitting an immediate distribution contingent on the forfeiture of a certain portion of a deferred amount, the haircut provision need not be removed retroactively for periods before January 1, 2009, where the plan has been operated in compliance with the applicable transition guidance (and thus no payment pursuant to the haircut provision has been made after December 31, 2004). In addition, a plan need not be amended to be made compliant with section 409A with respect to amounts deferred under the plan that were paid on or before December 31, 2008, in compliance with the transition guidance. However, the taxpayer must be able to demonstrate that the plan was operated in compliance with the transition guidance, including demonstrating that amounts were deferred or paid in compliance with the transition rules. For example, where payments were made in conjunction with elections of payment dates by either the service recipient or service provider during the transition period, the taxpayer must be able to demonstrate that the elections were provided and made in accordance with the transition rules."

The following Tax Management Portfolios: 383-3rd, Nonstatutory Stock Options 384-3rd, Restricted Property--Section 83 384-4th, Deferred Compensation Arrangements

ftp://ftp.irs.gov/pub/irs-pdf/p590.pdf See the explanation on page 60 and the worksheet on page 61 of IRS Publication 590, at the above link.

http://benefitslink.com/boards/index.php?showtopic=32100

If your question is about the annual elective deferral limit for contributions to the 403(b) plan, the 3% 414(h)(2) contributions are not counted (do not reduct the limit).

The table at the end of Notice 2005-95 describes the remedial amendment period for automatic rollovers as follows: "Latest of (1) December 31, 2005, (2) the end of the plan year that contains March 28, 2005, or (3) the tax filing deadline for the employer’s tax year containing March 28, 2005."

George: Thank you for that information.

I would appreciate any background on the following from the IRS's FY 2008 Federal State, and Local Governments Work Plan: "In FY2007, FSLG completed 17 examinations of Health Reimbursement Arrangements (HRAs) that did not meet the requirements of the Code. All 17 examinations involved the same provider. FSLG entered into a closing agreement with the provider in lieu of employment and income tax to resolve similar HRAs provided to more than 500 government entities. Based on the facts it was determined that a section 6700 examination of the provider was not necessary. FSLG has identified several additional providers of other HRAs that do not appear to meet the requirements of the Code. FSLG will conduct additional examinations to investigate these programs. Upon completion of these examinations, FSLG will also consult with Counsel to determine whether a section 6700 examination should be conducted with regard to the promoters of the HRAs."

As to the initial question, see the following from the end of 1.409A-3(i)(1)(i): "A plan may provide that a payment upon the lapse of a substantial risk of forfeiture is to be made in accordance with a fixed schedule that is objectively determinable based on the date the substantial risk of forfeiture lapses (disregarding any discretionary acceleration of the lapse of the substantial risk of forfeiture), provided that the schedule must be fixed on the date the time and form of payment are designated, and any change in the fixed schedule will constitute a change in the time and form of payment. For example, a plan that provides for a bonus payment subject to the condition that the service provider complete three years of service, and subject to the further condition that such requirement of continued services will lapse upon the occurrence of an initial public offering, which condition if applied alone would constitute a substantial risk of forfeiture, may provide that a service provider is entitled to substantially equal payments on each of the first three anniversaries of the date the substantial risk of forfeiture lapses (the earlier of three years of service or the date of an initial public offering)."

November, 2007 News Flash, Employee Plan News: "Plan sponsors have asked the IRS whether a section 204(h) notice must be provided for certain PPA amendments in 2007. In addition to other guidance, the proposed regulations will provide the following — "• Benefit restrictions under §436. The notice required under §101(j) of ERISA for amendments restricting benefits in accordance with IRC §436 will satisfy both the timing and content requirements for a section 204(h) notice."

IRC § 219(g)(5) flush: "An eligible deferred compensation plan (within the meaning of section 457(b)) shall not be treated as a plan described in subparagraph (A)(iii)."

The change needs to comply with the transition rules in Notice 2007-86, section 3.01(B)(1).02. That might be a problem if the option will expire in 2007. See the following from the end of Notice 2007-86, section 3.01(B)(1).02: "Similarly, except as provided below with respect to certain discounted stock rights, an outstanding stock right that provides for a deferral of compensation subject to section 409A may be amended to provide for fixed payment terms consistent with section 409A, or to permit holders of such rights to elect fixed payment terms consistent with section 409A, and such amendment or election will not be treated as a change in the time and form of payment under section 409A(a)(4) or an acceleration of a payment under section 409A(a)(3), provided that the option or right is so amended, and any elections are made, on or before December 31, 2008. For this purpose, a stock right will not be treated as payable in a year solely because the stock right is exercisable during that year, if the stock right is also reasonably expected to be exercisable in a subsequent year."

At the risk of continuing to be unhelpful to you, I don't think 1.409A-1(b)(5)(i)(B) defines what you describe as a stock appreciation right. That regulation starts: "A right to COMPENSATION based on the appreciation in value of a specified number of shares of service recipient stock occurring between the date of grant and the date of exercise of such right (a stock appreciation right) . . . ." My understanding of the law is that generally the price the issuing corporation pays under a buy-sell agreement to buy back vested resticted stock is taxed as capital gain, not compensation, and so the buy-sell agreement does not create a right to compensation and so is not a stock appreciation right.

Some time ago I had to sort out whether a buy-sell agreement could have a compensation element for 409A purposes. My memory of where I came out is that so long as none of the sale proceeds is properly taxable as compensation (i.e. to the extent they are sale proceeds), 409A does not apply. I was concerned that the 409A regs on stock rights might aggregate a buy-sell agreement with the related stock rights if the buy-sell agreement has any compensation element, so I decided that the safe course is to scour the buy-sell agreement for possible compensation elements (such as whether the buy-sell agreement is structured to pay more than fair market value, either in the purchase price or by using too high of an interest rate for installment payments) and eliminate them. My guess (based of course on no facts) is that all the purchase price under the buy-sell agreement you are dealing with is all sale proceeds and so 409A does not apply.

Is your statement that this looks like discounted stock appreciation rights based on the buy-sell agreement? My reaction to your post is that this is restricted stock to which 409A does not apply unless there is a compensation element in the buy-sell agreement.

It seems to me that the IRS should clarify Notice 2007-86 by clarifying that the following regulations are applied by substituting references to December 31, 2008 for references to December 31, 2007, and substituting a reference to January 1, 2008, for the reference to January 1, 2008: 1.409A-1©(3)(vii) (transition rule for written plan requirement) 1.409A-1(i)(3) (specified employee identification date) 1.409A-1(i)(4) (specified employee effective date) 1.409A-1(i)(7) (nonresident alien employees) 1.409A-2(a)(13)(i) and (ii) (initial deferral election with respect to compensation paid for final payroll period) 1.409A-2(b)(2)(iv) (installment payments transition rule) Or do you think these substitutions are obvious?

I'll take a shot at this. I assume the plan is a defined benefit plan. My understanding is that a plan can credit service for a prior employer. Considerations include: 1. The plan might be subject to the vesting discrimination rules under pre-ERISA 401(a)(4). See 411(e)(2). 2. I believe that service for a prior employer cannot be credited for purposes of 415(b)(5)(A), but I've not researched this. Perhaps someone who has thought this through will post a reply.

CMC: If I understand your question, I agree with both of your colleagues, because they seem to be saying different things. #1 seems to be saying that the definition of "change in control" for purposes of the amount to be paid on severance need not be the 409A definition. I agree. #2 seems to be saying that the definition of "change in control" needs to be clear ("at least as rigorous as the 409A definition"), not that it needs to be the same as the 409A definition. I agree.