Everett Moreland

This is often referred to as a rolling risk of forfeiture. The IRS comments summarized at the following Web page indicate that the IRS has a regulations project in the works on this. http://hr.cch.com/news/pension/091906a.asp

ftp://ftp.irs.gov/pub/irs-drop/ blue and JanetM: The above is usually a good source for newly-posted IRS revenue rulings, revenue procedures, notices, and announcements.

A reliable answer to your question can be given only after detailed review of state statutes and the facts, but from your description I think it's likely that after such a review the conclusion would be that ERISA does not apply to the hospital's employee benefit plans.

Gompers: I think the rule for commissions in 1.409A-2(a)(10) is an exception to the general rule in 1.409A-2(a)(2) that an election to defer compensation for services performed during a year needs to be made before the year (even if not vested until several years later). See 1.409A-2(a)(4) and -2(b)(6) Example 6. So I don't see the rule for commissions as inconsistent with the idea that collection of accounts receivable is a "condition related to the purpose of the compensation" within the meaning of 1.409A-1(d)(1). But where the remaining uncollected accounts are assigned to the departing physician at the end of the specified run-out period, then I think that collection of the accounts is not a "condition related to the purpose of the compensation." I would appreciate your thoughts about whether the "accrued but unpaid amounts" referred to by crs are subject to the short-term deferral rule in 1.409A-1(b)(4).

The following might be helpful. 70 Federal Register 57930, 57936-37 (October 4, 2005): "D. Restricted Property "Consistent with Notice 2005-1, Q&A-4(e), these regulations provide that if a service provider receives property from, or pursuant to, a plan maintained by a service recipient, there is no deferral of compensation merely because the value of the property is not includible in income in the year of receipt by reason of the property being nontransferable and subject to a substantial risk of forfeiture, or is includible in income solely due to a valid election under section 83(b). However, a plan under which a service provider obtains a legally binding right to receive property (whether or not the property is restricted property) in a future year may provide for the deferral of compensation and, accordingly, may constitute a nonqualified deferred compensation plan. "Commentators asked for clarification with respect to how this provision applies to a promise to transfer restricted property in a subsequent tax year. Specifically, commentators questioned how section 409A would apply to a bonus program offering a choice between a payment in cash and a payment in substantially nonvested property. Because the promise grants the service recipient a legally binding right to receive property in a future year, this promise generally could not constitute property for section 83 purposes under Sec. 1.83-3(e), and could constitute deferred compensation for purposes of section 409A. However, the regulations provide that the vesting of substantially nonvested property subject to section 83 may be treated as a payment for purposes of section 409A, including for purposes of applying the short-term deferral rule. Accordingly, where the promise to transfer the substantially nonvested property and the right to retain the substantially nonvested property after the transfer are both subject to a substantial risk of forfeiture (as defined for purposes of section 409A), the arrangement generally would constitute a short-term deferral because the payment would occur simultaneously with the vesting of the right to the property. For example, where an employee participates in a two-year bonus program such that, if the employee continues in employment for two years, the employee is entitled to either the immediate payment of a $10,000 cash bonus or the grant of restricted stock with a $15,000 fair market value subject to a vesting requirement of three additional years of service, the arrangement generally would constitute a short-term deferral because under either alternative the payment would be received within the short-term deferral period." Proposed Treasury Regulation Section 1.409A-1(b)(6): "(6) Restricted Property--(i) In general. If a service provider receives property from, or pursuant to, a plan maintained by a service recipient, there is no deferral of compensation merely because the value of the property is not includible in income in the year of receipt by reason of the property being substantially nonvested (as defined in Sec. 1.83-3(b)), or is includible in income solely due to a valid election under section 83(b). For purposes of this paragraph (b)(6)(i), a transfer of property includes the transfer of a beneficial interest in a trust or annuity plan, or a transfer to or from a trust or under an annuity plan, to the extent such a transfer is subject to section 83, section 402(b) or section 403©. "(ii) Promises to transfer property. A plan under which a service provider obtains a legally binding right to receive property (whether or not the property will be substantially nonvested (as defined in Sec. 1.83-3(b)) at the time of grant) in a future year may provide for the deferral of compensation and, accordingly, may constitute a nonqualified deferred compensation plan. The vesting of substantially nonvested property subject to section 83 may be treated as a payment for purposes of section 409A, including for purposes of applying the short-term deferral rules under paragraph (b)(4) of this section. Accordingly, where the promise to transfer the substantially nonvested property and the right to retain the substantially nonvested property are both subject to a substantial risk of forfeiture (as defined under paragraph (d) of this section), the arrangement generally would constitute a short-term deferral under paragraph (b)(4) of this section because the payment would occur simultaneously with the vesting of the right to the property. For example, where an employee participates in a two-year bonus program such that, if the employee continues in employment for two years, the employee is entitled to either the immediate payment of a $10,000 cash bonus or the grant of restricted stock with a $15,000 fair market value subject to a vesting requirement of three additional years of service, the arrangement generally would constitute a short-term deferral under paragraph (b)(4) of this section because under either alternative the payment would be received within the short-term deferral period."

I would start with Revenue Procedure 2006-27, § 5.02(2)(a)(i), which defines this as an Operational Failure.

Peter: I've not worked with a 403(b) plan requiring mandatory employee-funded contributions, but perhaps the following will help. As saabraa writes, the following IRC Section 414(h) limits pickups to 401(a) plans and 403(a) annuities: "(1) IN GENERAL Effective with respect to taxable years beginning after December 31, 1973, for purposes of this title, any amount contributed-- "(A) to an employees' trust described in section 401(a), or "(B) under a plan described in section 403(a), shall not be treated as having been made by the employer if it is designated as an employee contribution. "(2) DESIGNATION BY UNITS OF GOVERNMENT "For purposes of paragraph (1), in the case of any plan established by the government of any State or political subdivision thereof, or by any agency or instrumentality of any of the foregoing, where the contributions of employing units are designated as employee contributions but where any employing unit picks up the contributions, the contributions so picked up shall be treated as employer contributions." The following is from IRC Section 403(b)(12)(A): "For purposes of clause (i), a contribution shall be treated as not made pursuant to a salary reduction agreement if under the agreement it is made pursuant to a 1-time irrevocable election made by the employee at the time of initial eligibility to participate in the agreement or is made pursuant to a similar arrangement involving a one-time irrevocable election specified in regulations." IRM 4.72.13.5.1.1(1) (03-01-2005) states: "Elective deferrals for income tax purposes do not include elective contributions made pursuant to a one-time irrevocable election that is made at: "a. initial eligibility to participate in the salary reduction agreement, or "b. pre-tax contributions made as a condition of employment." Proposed 1.402(g)(3)-1(b) states: "Notwithstanding paragraph (a) of this section, for purposes of section 402(g)(3)©, an elective deferral only includes a contribution that is made pursuant to a cash or deferred election (as defined at section 1.401(k)-1(a)(3)). Thus, for purposes of section 402(g)(3)©, an elective deferral does not include a contribution that is made pursuant to an employee's one-time irrevocable election made on or before the employee's first becoming eligible to participate under the employer's plan or a contribution made as a condition of employment that reduces the employee's compensation."

If you are refering to 414(h)(2) pickups, 414(h)(2) does not apply to 403(b) plans. In all cases I can think of, 414(h)(2) pickups involve mandatory employee contributions. The pickup consists of the employer agreeing either to fund the employee contributions or, if funded by the employees, to make the contribution pre-tax.

There are two questions here: 1. Is the noncompete a substantial risk of forfeiture under 457(f). My comments under 2. below assume it is. I think that under the § 83 regulations this is a question of fact. The IRS has a regulations project on this. See http://hr.cch.com/news/pension/091906a.asp. 2. If the noncompete is a substantial risk of forfeiture under 457(f) but not under 409A, is that a problem? It think it is not a problem. It means you can't use the 2-1/2 month rule under 409A so you have to have a payment schedule that complies with 409A. I think that if the employee forfeits before the time for payment under the payment schedule, that does not violate 409A.

Revenue Ruling 2004-10 might be on point

Perhaps the facts will allow you to conclude that the employer holds as a trustee or nominee of the trustee.

See Treasury Regulation § 1.72-15, captioned "Applicability of section 72 to accident or health plans," particularly the following 1.72-15(h): "Employer contributions to provide medical benefits described in section 401(h) under a qualified pension or annuity plan are not includible in the gross income of the employee on whose behalf such contributions were made. Similarly, if the trustee of a trust forming a part of a qualified pension plan applies employer contributions which have been contributed to provide medical benefits described in section 401(h) or earnings thereon, to purchase insurance contracts which provide such benefits, the amount so applied is not includible in the gross income of the employee on whose behalf such insurance was purchased. The payment of medical benefits described in section 401(h) as defined in paragraph (a) of Section 1.401-14 under a plan established by an employer shall be treated in the same manner as the payment of any other accident or health benefits under an employer- established plan. See paragraphs (b), ©, and (d) of this section."

IRC Section 402©(3)© excludes from eligible rollover distributions "any distribution which is made upon hardship of the employee."

Gompers: That is what I am saying. For the reasons stated in the preamble, at 70 Federal Register page 57932, I think it makes sense to specify a payment date.

I think that collection of receivables is a "condition related to the purpose of the compensation" within the meaning of 1.409A-1(d)(1).

Central Laborers’ Pension Fund v. Heinz, 541 U.S. 739 (2004), and 1.411(d)-3 prevent suspending actuarial increases in benefits accrued before the plan adopts the suspension rules.

The August 3, 2006, Congressional Record, at S8756, includes the following: "Mr. GREGG. . . . . My further understanding is that the term 'market rate of return' is intended to include a fixed rate of interest that is no greater than the yield on long-term, investment-grade corporate bonds at any time during a reasonable period before the rate is first applied under the plan; is this correct? "Mr. ENZI. Yes, it is."

Submit under VCP, RP 2006-27, as an operational error and credit the particpants with the benefit.

In October 2004 I found a copy through Westlaw. My guess is they are still available through Westlaw.

As many as it likes

Mike: Ignore my question in my prior post. After reading Miller and your post again I think I've at last got it--the amount of the DB accrued benefit at the second termination that is offset by the DC account balance at the first termination equals the amount of the DB accrued benefit at the first termination that was offset by the DC account balance at the first termination. Harry O: I now understand your post.

Mike: My reading of Miller (which I think is the same as yours) is that the excess of the converted DC account balance at the first termination over the DB benefit at the first termination cannot be used to offset the DB benefit at the later termination. I think the opinion is clear on that. Do you think the opinion requires using the lump sum interest rate and mortality table to convert the DC balance at the first termination to an annuity at the second termination?

Harry O; Thank you for your reply. I'm concerned that the following from Miller means that the offset for the DC distribution should not be determined by projecting the distribution to normal retirement age using an interest assumption, but instead should be determined by calculating the accrued benefit the lump sum value of which, on the date of the earlier distribution, equals the earlier distribution: "An accrued benefit under a defined benefit plan is ordinarily expressed as an annuity commencing at normal retirement age. See 29 U.S.C. § 1002(23)(A). Thus, the 'accrued benefit attributable to the distribution' for each Employee should be expressed as an annuity. When the Employees first left Xerox, they received Profit Sharing Plan distributions because their Profit Sharing Plan account balances exceeded the accrued benefit which they were guaranteed under the Income Guarantee Plan formula. Essentially, the Profit Sharing Plan distributions substituted for the lump-sum equivalent of the Income Guarantee Plan formula benefit, because the Profit Sharing Plan accounts could have purchased a larger annuity. The accrued benefit attributable to the Profit Sharing Plan distributions is simply the Income Guarantee Plan annuity amount that those distributions replaced. The portion of the Profit Sharing Plan distributions that exceeded the lump-sum value of the Income Guarantee Plan annuity benefit represented a payment from an individual, defined contribution account, not any portion of an 'accrued benefit' under the Income Guarantee Plan defined benefit formula. That excess distribution, and any change in the value of the distribution, should not affect the amount of the 'accrued benefit' — under the Income Guarantee Plan defined benefit formula — that was attributable to the distribution when it was made. In short, Xerox may not use a projected-to-the-present value generated from a phantom account as a proxy for the actual distribution amount."

http://www.ca9.uscourts.gov/ca9/newopinion...pdf?openelement Miller v Xerox Corp. (9th Circuit 5/8/06), at the above link, deals with offsetting the accrued benefit in a floor-offset plan for an earlier distribution from a defined contribution plan. Miller requires limiting the offset to the "accrued benefit attributable to the distribution" within the meaning of 1.411(a)-7(d)(6)(i). Miller requires, I think, calculating the accrued benefit the lump sum value of which, on the date of the earlier distribution, equals the earlier distribution. My question is, where the earlier distribution was a lump sum, is this actuarial equivalence to be calculated using the plan's interest rate and mortality table for lump sums or the plan's interest rate and mortality table for annuities? The logic of Miller seems to require using the plan's interest rate and mortality table for lump sums.

mjb: Thank you for questioning my assumptions about how IRC Section 409A applies to a disqualified plan. I'm starting to wonder whether 409A applies to a disqualified plan. I would appreciate any comments. Here's my analysis: 1. My understanding is that if a funded plan is never qualified, then 409A does not apply to the plan. Proposed Treasury Regulation Section 1.409A-1(b)(6) (quoted in 7 below). 2. My understanding is that if all participants fully vest before the first year a qualified plan becomes disqualified and IRC Section 402(b)(4) does not apply to the disqualification, then the disqualification does not cause the then-accrued plan benefits to be taxable under 402(b) before distribution. 402(b)(1) and (2); Treasury Regulation Section 1.402(b)-1(b)(1); IRM 4.72.12.2.3(2)c ("When a qualified plan becomes nonqualified, the employee-participant is not taxed on his/her account balance attributed to employer contributions while the plan was qualified or increases in the account balance attributed to trust earnings"). 3. My concern is that, because these benefits are not taxable under 402(b) until distribution, they are untaxed vested nonqualified deferred compensation and so are immediately taxable under 409A, which adds to the regular tax a 20% penalty tax and interest for the deferral period. I am assuming that the plan does not satisfy 409A and that the benefits are not grandfathered under Proposed Treasury Regulation Section 1.409A-6. 4. IRM 4.72.12, which was issued with a date of 12/31/05, implies, in the sentence quoted in 2 above, that 409A does not apply, but IRM 4.72.12 does not refer to 409A. 5. IRS Notice 2005-1 (about 409A) and proposed Treasury regulations under 409A do not explicitly discuss this. One way to conclude that 409A does not apply is to conclude that the provision in 409A(d)(1) and (2) that 409A does not apply to a qualified plan means "qualified at the time of the contribution." 6. The following from the preamble to the 409A proposed regulations is the clearest IRS discussion I've found so far. It doesn't answer whether 409A can apply to a plan that become disqualified. "Commentators requested clarification of the application of section 409A to participation by U.S. citizens and resident aliens in foreign plans. In this context, it should be noted that under these regulations, transfers that are taxable under section 402(b) of the Code generally are not subject to section 409A. See Sec. 1.409A-1(b)(6) of these regulations and Notice 2005-1, Q&A-4. Such transfers may consist of contributions to an employees' trust, where the trust does not qualify under section 501(a). Many foreign plans that hold contributions in a trust will constitute funded plans. To the extent that a contribution to the trust is subject to inclusion in income for Federal tax purposes under section 402(b), such a contribution will not be subject to section 409A." (70 Federal Register 57938 (October 4, 2004)) 7. Following are the relevant parts of the 409A proposed regulations and IRS Notice 2005-1 cited by the IRS in 6. above: 1.409A-1(b)(6): "If a service provider receives property from, or pursuant to, a plan maintained by a service recipient, there is no deferral of compensation merely because the value of the property is not includible in income in the year of receipt by reason of the property being substantially nonvested (as defined in Sec. 1.83-3(b)), or is includible in income solely due to a valid election under section 83(b). For purposes of this paragraph (b)(6)(i), a transfer of property includes the transfer of a beneficial interest in a trust or annuity plan, or a transfer to or from a trust or under an annuity plan, to the extent such a transfer is subject to section 83, section 402(b) or section 403©." Notice 2005-1, Q&A-4(e): "If a service provider receives property from, or pursuant to, a plan maintained by a service recipient, there is no deferral of compensation merely because the value of the property is not includible in income (under § 83) in the year of receipt by reason of the property being nontransferable and subject to a substantial risk of forfeiture, or is includible in income (under § 83) solely due to a valid election under § 83(b). . . . . For purposes of this paragraph, a transfer of property includes the transfer of a beneficial interest in a trust or annuity plan, or a transfer to or from a trust or under an annuity plan, to the extent such a transfer is subject to § 83, § 402(b) or § 403©."