jpod

I guess I didn't make my point clearly. I understand what the proposed regs. say. I am conceding that the Section 83 exclusion in the statute is inapplicable because the grant of an option is not a "transfer of property" described in Section 83. Also, let's assume that the option is immediately vested (but not transferable). My point is simply this: what does 457(f) mean when it says "a plan . . . providing for a deferral of compensation"? What is it about a grant of a discounted, fully vested option that constitutes a deferral of compensation? Why is it not CURRENT compensation outside the realm of Section 457? Why would the same event - the grant of a discounted option - trigger an income tax liability under Section 457, but no FICA or Medicare tax liability under Section 3121?!? What sense does that make?!? Believe me, I've always been skeptical about these option arrangements, but I have difficulty figuring out what it is about Section 457 that would draw them in. I understand that many of these programs involve an employee giving up current cash in exchange for a discounted option, but so what? Maybe we just have another viable loophole and if the IRS doesn't like it the Congress will have to close it. deferral of compensation deferral of compensation

We've all seen (on this Board and elsewhere) the arguments pro and con with respect to discounted options granted to employees of tax-exempt employees, and the effect of the new proposed regulations. Surely it will be very interesting to see what happens down the road, in court or otherwise. What is the IRS' response to the following assertion: The grant of a discounted option involves CURRENT compensation, not DEFERRED compensation. The option is a valuable property right; it is not a mere promise to pay compensation in the future. It is CURRENT compensaton which happens to be taxed in a unique way under Section 83 (i.e., no taxation until the transaction is "closed" at exercise). The grant of the option does not involve DEFERRED compensation; therefore, Section 457 does not apply. Cf. Reg. Section 3121(v)(2)-1(B)(4)(ii) (the grant of a stock option does not constitute the deferral of compensation for purposes of Section 3121(v)(2) of the Code).

Blinky: Are you suggesting (1) the client has not looked hard enough; or (2) something else. There are people who did time as guests of Uncle Sam for implementing suggestion (2).

Based on the facts presented, it sounds like there is no "plan." So, it is impossible to correct through EPCRS or otherwise; employer's tax deductions for "contributions" are probably at risk, but more facts are needed to determine whether deductions are at risk OR plan participants owe back taxes for past years' "contributions." Good news is no 5500s were required (probably). While the employer should seek ERISA/tax counsel, it should also find a good professional malpractice plaintiff's lawyer.

I don't have an answer for you, but I'm curious about something: why isn't this a nontaxable benefit? If the concern about taxability is based on assumption that the benefit is a discriminatory self-insured benefit, see Treas. Reg. Section 1.105-11(g).

Two further thoughts: 1. If the employee went immediately from full-time to part-time, or if there was an agreement to rehire the employee shortly after he "terminated," there was no bona fide severance from employment/termination of employment/separation from service (or whatever you wish to call it). Therefore, unless the employee was 59-1/2 at the time of the distribution (and the plan provides for in-service distributions), the previous posters' suggestions are worthy of serious consideration. 2. If the termination was bona fide, I suspect that you may not have an operational violation, unless the plan provides that you cannot receive a distribution if you are rehired prior to the distribution.

1. Whether the employee has to sign off on the QDRO is a matter of state domestic relations and civil procedure law (although the answer is probably "no"). 2. The good news is that a QDRO would give her confidence of receiving the money each month. The bad news is that she would be taxed on the $200, whereas the $200 per month under the property settlement may be tax-free to her (assuming it is truly property settlement and not alimony). 3. Take 2 and call us in the morning.

No takers on this one?

Public school district will set up a 457(B) plan in 2002. Terminated employees receive accrued vacation and sick pay in a lump sum within days or possibly weeks after termination, not in final paycheck. Question: Can 457(B) participant defer out of the termination pay? (Assume all other requirements and limitations of 457(B) will be met.) Note that as a result of the Job Creation and Worker Assistance Act of 2002 technical corrections, the definition of "includible compensation" for purposes of Section 457(B) is the Section 415©(3) definition. Severance/termination pay clearly qualifies as 415©(3) compensation. I am aware of the IRS' generally negative views about deferring into a 401(k) plan out of post-termination severance pay, but I don't see "active employment" as a requirement for 457(B) deferrals. One difficulty may be that 457(B)(1) says that "only individuals who perform service for the employer may be participant." However, I don't see why this would preclude a deferral out of severance/termination pay, as long as the deferral election is made prior to termination date. Any thoughts?

That is not what the cited regulatory provision means, and now that you mention it I'd be surprised if the book really says that's what the provision means. The purpose of that provision is to make it clear that you cannot take a participant's elective deferral account balance into account in applying a vesting schedule to matching or other contributions; otherwise, you will not have a qualified CODA. Look at the example in the regs. Following R. Butler's interpretation, you could ignore a participant's elective deferrals for purposes of applying the $5,000 mandatory cash-out limit to the participant's other accounts. However, don't we all agree that the $5,000 limit does not work that way? So, getting back to the original question: what is the authority for ignoring elective deferrals in applying the deemed cash-out rule? My position is that if a participant decides to leave his elective deferral account in the plan, you cannot forfeit the non-vested portion of his other account(s) until he has a 5-year BIS.

Seems to me that the ERISA outline book is wrong. Is there any authority for ignoring elective deferrals for purposes of the "deemed cash-out" rule?

Anyone still interested in this topic should check out the IRS' 2001 CPE text. In that text, the IRS indicates that there may be other ways to establish a substantial risk of forfeiture besides continued services for purposes of 457(f). The discussion in the CPE text then proceeds to analyze the Section 83 regs to a variety of 457(f) scenarios.

You may wish to think about whether the timing of the establishment of a second plan could raise any issues under Section 1.401(a)(4)-5 of the regulations.

Tom: I'm not grasping your point(s), but that's ok. Also, while the vast majority of 457(B) plans are elective plans, the vast majority of legitimate 457(f) plans are not elective. (I use the term "legitimate" because I don't believe that any rational executive would agree to make an elective deferral of compensation that is subject to a BONA FIDE substantial risk of forfeiture.) The 457(f) plans which I have seen are, typically, SERP-type plans that serve as handcuffs.

No filing on Form 5500 series is required for an unfunded welfare benefit plan covering less than 100 participants at the beginning of the plan year. (I, too, however, have the same tax questions as a previous poster, assuming you are "self-employed" for tax purposes , i.e., an unincorporated sole proprietor.)

My hypothetical does not involve elective deferred comp. To the contrary, it involves something in the nature of an employer-funded SERP. It is a very real example of how a non-profit may wish to provide deferred compensation to an executive, yet subject it to a condition other than, or in addition to, the completion of a period of service. If you folks are saying that 457(f) applies only to elective deferred comp., I respectfully disagree.

PJKoehler: I understand what you're saying, but I'm not convinced that "future services" will be the only risk of forfeiture that works in a 457(f) plan. What if the plan said that the executive gets his money if (1) he remains with the organization until age 60, and (2) within the next two years thereafter the United States lands a man on the planet Neptune? OK, that's silly. But, what if the plan said that the executive gets his money if (1) he remains with the organization until age 60, and (2) within the next two years thereafter the organization's outstanding debt is reduced below some dollar threshold? Under your interpretation, the executive would be taxed at age 60 no matter how great the risk that the debt reduction requirement may never be satisfied. I find it hard to believe that the intent of Congress was to automatically tax the executive at age 60 in this situation, either in 1978 at the time that 457 was enacted or in 1986 when it was extended to non-profits.

To PJKoehler: Is there authority to confirm that 457(f)(3)(B) is intented to be all-inclusive? In other words, maybe the "substantial services" rule set forth in that provision is a safe harbor, but other risks of forfeiture may work too. For example, what about a CEO of a major hospital who retires at age 60 and must complete an econcomically-meaningful 2-year covenant not to compete before he has the right to receive his 457(f) benefits?

I'm taking a shot in the dark at this without looking at the regulations, but I would say (1) the registration fees are eligible if they relate solely to the program of care and if the fees for the program itself are otherwise eligible, and (2) the registration fees should be considered "incurred" over the period the care is provided, to the extent not refundable. So, if the child is pulled out of the program after one day, any non-refundable registration fees and other costs which are non-refundable should qualify.

Putting aside the question of whether there is some advantage to funding a 129 program through a VEBA, it strikes me that dependent care assistance may not be a permissible "other benefit" which is allowed to be funded through a VEBA (i.e., the funding vehicle could not qualify as a tax-exempt VEBA under Section 501©(9) of the Code). Is there any authority from IRS on this issue?

As I read the notice, you only have to file a Form 5500 to the extent that the Plan is subject to filing under Title I of ERISA. So, for example, if you've been filing a single Form 5500 for a fully insured health plan with a Section 125 premium-conversion feature, but covering fewer than 100 participants, you don't need to file a Form 5500. Similarly, if you had been filing a separate 5500 with a Schedule F solely to comply with the 6039D requirement, you will no longer have to file that 5500. Another situation would be if you are a church plan or a governmental plan filing solely under 6039D. One question: the notice seems to suggest that the 6039D filing is waived for any return which has not been filed yet (as opposed to returns which are not due yet). Does that mean that if you should have been filing for the past 10 years, but have failed to file, you are now off the hook for failing to file as required (formerly) by Section 6039D????

"Certain Exempt Organizations Permitted as Shareholders" is merely the title of Section 1361©(6). The pertinent text of Section 1361©(6) says: ". . . an organization which is . . . described in Section 401(a) . . . may be a shareholder in an S corporation."

I'm not sure I agree with the warning not to call the Senator or Representative to ask for help. Unless this case is caught up in the cash balance suspense, 3 years is outrageous. If you feel comfortable with your position on the allocation of the surplus, I'd give the Congressional pressure angle a try. If you were an EP manager, and you had a Representative or a Senator on your back for holding a case open for 3 years, wouldn't you want to make that case disappear quietly?

Any 401(a) plan can be a shareholder of an S corp. However, if the plan is something other than an ESOP, the plan must pay UBTI tax on its share of the S corp's income, whether or not the S corp pays dividends.

If I can dig out the citations later, I'll post them. A plan loan is not treated as a debt for bankruptcy law purposes. On the other hand, the individual cannot be permitted to continue to pay money to his or her plan where it would then enjoy the status as excluded property (although most likely a good argument could be made that loan payments made after the bankruptcy filing are not excluded from the debtor's estate). Obviously, the bankruptcy trustee or the court has to find out out about the outstanding plan loan, but this usually will happen after the trustee gets a look at the individual's pay stubs. Once it becomes known, the employer is directed to stop withholding loan repayments. Insofar as the adverse tax consequences of a default may be concerned, the bankruptcy courts couldn't care less.