jpod

Let's be clear. In my first post I said that I was just throwing out the concept for consideration, because there was nothing in KJ Theo's original post to suggest that it couldn't be viable. Then, someone else said "no way," so that led to responses as to why it could be "way."

Larry is way overstating his case in my opinion. For example, the Board of Directors of a corporate plan sponsor, which 99.9% of the time will have authority to adopt or amend a retirement plan on behalf of the corporation, quite often approves plan documents or amendments and there is no signature on the document or the amendment. I have never had an issue with IRS over this in my years of practice, or with any other constituency, such as ERISA lawyers on the other side of a merger or other acquisitive transaction conducting due diligence, and I've had a few years. The issue is whether the document or amendment by its terms purports to be ineffective absent signature. If it does not, the fact that there is a signature line that was never signed is irrelevant if you have proof of adoption and the date thereof in accordance with the Plan Sponsor's internal rules of governance.

Unless the document's explicit terms says it is not effective until signed, if there were Board of Directors' resolutions approving the adoption of that document a certified copy of those resolutions or a certified copy of minutes of the meeting at which the resolutions were adopted could serve as sufficient "execution," with the signing and dating of the Plan document merely a meaningless formality. Just a possibility I am throwing out there. That being said, absent any other monkey business I think this should be a relatively easy fix through VCP.

All good points. However, there is still the issue of the employee having to pay tax on the amount of the premium, and the conundrum of withholding FIT, FICA, Medicare and State taxes, unless the employer grosses up the employee, which would make this much more expensive for the employer as compared to straight cash or some other deferred retention bonus for the same amount of money each year.

Yeah, so what? (And I ask that with all due respect to BG5150 and seriousness.) Why not just give the employee the money and let him by insurance if he wishes to do so?

Yeah, these have been marketed as such for a long time. I never bothered to figure out why it's supposed to be something special, but like you I've assumed it isn't. Maybe there is some break on the premium if it is procured by the employer directly, but I never investigated that.

Does not compute. 162(f) is a provision disallowing deductions for fines, penalties and the like.

Jpod: Please defined "credit risk"; I'm not sure what you are referring to here. Thanks. The risk that there won't be money to pay the benefit, due to the employer's creditors' preference in bankruptcy or otherwise.

I forgot: Not for 3121(v) either.

Credit risk is not a SRF; not for 409A or 457(f).

Fairness, I suppose, is in the eye of the beholder, but to the extent one would view it as unfair it was made worse by the TRA 86 because since then we have a SLOB exception that is available only to larger organizations.

You're right; Larry was just being "fancy" with his language. Everyone who works with NQDC plans equates "vesting" with "no SRF." And I agree that whether to informally fund or not is an entirely separate issue. However, if you were an employee of a private company, would you be willing to defer part of your compensation if it wasn't going to be parked somewhere so you can "see it" and manage its investments through some type of informal funding vehicle? For example, if you can defer your $20,000 bonus, and the employer says "I won't set it aside in a segregated account, but I promise to pay it to you with interest at X% per year when you leave employment," would you be happy with that? I suspect most would not be happy with that. So, my only point is that if I am an S corp owner I would have no interest in putting cash aside and out of my or my company's hands without the benefit of a current tax deduction.

Thanks for the kind words Larry. Please consider changing your attitude a bit when responding on this Board. Do you know what "informally funded" means? It means depositing money in a Rabbi Trust, or in a custodial account in the name of the Employer, or something comparable, but in either case it means CASH OUT THE DOOR instead of reinvested in the business or put in the S corp owner's pocket, but in the NQDC context there isn't a corresponding tax deduction, even if the NQDC is fully vested. That's a nice tax deferral for the employee (but with the obvious credit risk), but a lousy deal for the S corp owner. I wasn't talking about unfunded SERPs or other unfunded retention-type incentives.

Sure, but I suspect that most people when they hear "NQDC" are thinking elective and fully vested deferred compensation, which, if informally funded, has no attribute other than a tax deferral for the service-provider. If I were an S corp owner I don't know that I would want to have to put away money for an employee in 2018 but not be able to get a deduction for that money until a year or more later.

Well, if I were in your shoes I would turn to the IRS' regulations under Section 125, and the proposed regulations, and find the answer. I just don't know what it is.

Is the employer a C corporation or an S corporation? This is an issue only for an S corporation. There is no tax benefit under Section 125 for a 2% shareholder of an S corporation. (However, he would get an above-the-line tax deduction for health insurance premiums paid by him or on his behalf.) Whether his purported participation in the plan "causes issues for the plan" is not something I am sure about.

Interesting question. I haven't researched the 411 regs, so this is off the seat of the pants. Don't know what an AP is for 411 purposes, but certainly an AP is not a participant. An AP is a beneficiary for purposes of Title I. So, perhaps an AP's interest is comparable to a beneficiary's death benefit interest, and aren't death benefits carved out from protected benefits?

I am not trying to answer your question, but something tells me that using the employee contributions to pay premiums on a policy that benefits the employer could be a pt.

it is not a pt

I would like to give HJ the benefit of the doubt and that he/she is in fact the S corp owner poking around looking for ideas. If that's the case, HJ should start with his or her regular tax advisor, who already has pertinent facts about HJ, rather than a message board (even this one!).

I don't think that answers my question, but thanks.

I think that concept only applies if the right to deferred compensation can be assigned for value, which would not be the case here. Believe me if I were advising the Employer I would advise against it for various reasons, but I don't see a 409A or constructive receipt problem.

I don't see how it would violate 409A, but you're correct that it would have absolutely no impact on tax result or the employer's tax-reporting obligations. If Exec. thinks this accomplishes some asset protection or estate planning objective that couldn't be accomplished by taking the money first and then contributing it to the trust, I would be very skeptical of that.

Maybe another one of the "old-timers" will know this; I am drawing a blank. Many DC plans have a requirement that an otherwise eligible plan participant must complete a minimum hours of service during the plan year to receive an employer contribution, but IRS LRMs say that it can't be more than 1,000 hours, which is what I always assumed is the limit. Does anyone know what the source of the 1,000-hour ceiling is (a Rev. Rul. or a regulation)? Is it based on 410(a)? If it is based on 410(a), does that mean all of the hour-counting service-crediting rules applicable to eligibility would apply for the annual contribution requirement (e.g., you must count hours not worked for which you are paid up to 501 hours)?

Austin, you are not likely to find anything because it's kinda "Tax 101" that it would never make sense, isn't it?