jpod

Not sure which is the best forum, but I will try this one. If an LLC elects to be taxed as a corporation under the "check-the-box" rules, is it a "corporation" for all purposes under the 414(b) and © rules? The logical answer seems to be clearly "yes," but I don't recall ever seeing any confirmation of that.

Payment received in exchange for stock from the buyer is a capital transaction, whether it occurs five years or five minutes after exercising the stock option. IN no way should any amount received from buyer be treated as W-2 under these circumstances. 409A is irrelevant.

First, you are assuming that the shares you acquired upon exercise are worth $10MM, but that may not be the case depending upon the likelihood that you and the other shareholder(s) will actually receive the escrow. (For example, is the escrow subject to a difficult earn-out condition, or is there pending litigation which causes the true FMV to be less than $20MM?) Let's assume your shares are in fact worth $10MM. In that case, upon exercise of the NQSO you take a tax basis in the shares of $10MM. The $9MM you receive as sales proceeds on Day 2 is not compensation or reportable on a W-2. Similarly, anything you receive out of escrow is sales proceeds and not compensation.

We don't wish to correct anything. We wish to get rid of the plan. If we were to take steps per the correction procedures to make this clearly a st deferral arrangement, and then immediately terminate the plan, I don't see how that could possibly pass the smell test.

401(a) Chaos. Thanks for your thoughts. Let me know if you agree with this line of thinking. Suppose the Company and the plan participants wish to be conservative and proceed on the assumption that there is a real 409A problem with dumping this plan. Let's then suppose that they agree to dump the plan anyway and each participant is paid $X, and it will be reported as a 409A violation. It seems to me that the only adverse consequence of this is that the participants will have to pay the extra 20% tax on the $X, and there is no "interest" charge because the participants were never vested. So, if the Company grosses them up for the 20% additional tax assuming a 40% marginal tax rate (Fed. income tax, Medicare and State income tax), the additional cost to the Company is 33-1/3% of $X. (There is no additional 20% on the gross-up.)

Well if that's the case why are you worrying about coverage testing?

Is it clear that the plan of the tax-exempt entity owned by a governmental employer is not also a governmental plan? Could the 414(d) definition apply to a plan maintained by a wholly-owned subsidiary of a governmental entity? Probably a fact-sensitive inquiry, but has anyone analyzed the pertinent facts?

That's pretty darn good for "off the top of the head." Your analysis is basically the same as mine. I don't know, but I am pretty certain that nobody was interested in latching on to the S-T Deferral exemption. I am pretty certain that the goal was to make sure that the phantom participants got paid only when the shareholders/company got paid, while at the same time structuring this to comply with 409A. That would explain the 3-year time limitation, although under 409A they could have gone out as far as 5 years. Assuming there is no S-T deferral, my other thought here is that perhaps we don't even have a "legally binding right," which is a pre-condition for entering into the realm of 409A in the first place. Specifically, it is within the total control of the Company/shareholders to sell the Company at all, ever, and if they do decide to sell the Company, in view of the the 3-year time limitation it is within the total control of the Company/shareholders to structure a deal whereby there is no payment whatsoever during the first three years and therefore the phantom participants would get zero. Too much of a stretch? The problem is that now there is a desire to dump this plan, but it can't be dumped unless the participants agree to that, and obviously they won't agree to that unless we pay them something to agree to dump it, and if we pay them something in exchange for their agreement to dump it that would be an impermissible acceleration (I think) if we have a plan subject to 409A. The voluntary termination exception is not viable here for a couple of reasons which I'd rather not get into.

Bumping this up. Any thoughts?

Who is to say that the employee provided false documents to show date of birth at hire? Evidently he lied, but most likely the DB plan was nowhere on his radar screen. I've seen this type of after-the-fact discovery several times because age discrimination was common, and still is. It is quite likely that this individual's real age was a whole lot closer to 50 or older when hired, rather than 40 or younger, and he may have had legitimate fears.

Plan provides for payment to participants of a portion of the sales proceeds if (and only if) there is a change in control. (It is a 409A-compliant definition of change in control, if that's relevant). Payment is to be made at the same time as the sales proceeds are paid to the selling owners (if a stock sale) or to the corporation (if an asset sale). If part of the sales proceeds are in future installments or escrowed or subject to earn-out contingencies, participants get paid their respective shares only as those deferred or contingent payments are received, but in no event will participants have any right to a share of payments received later than 3 years after the change in control. If this arrangement is a ST Deferral not subject to 409A, the corporation and one or more participants can agree to cancel their participation in exchange for a lump sum payment now (there is no change in control in sight). If the arrangement is subject to 409A, this would be a prohibited acceleration. (Can't use the voluntary termination exception here.)

Please explain why the value at vesting is X but the merger consideration is Y.

I think you would be wise to read the proposed regulations' definition of "care of qualifying individual" before you deny the reimbursement based on some comments on this message board. The standard is fairly liberal.

While people can engage in a fascinating intellectual discussion of this situation, the fact remains that the only position to take to squirm out of it is that it was a constructive distribution. If it was an impermissible (constructive) distribution, then it is repairable through EPCRS. If one takes the position that it truly was a plan-level contribution, then it certainly was a PT and almost certainly an exclusive benefit violation, and you've burnt the house down to the ground.

QDRO, I agree, which is why I said the answer "may" be different. If it's a sham it won't work, and frankly the OP's framing of the issue suggests that the sole motivation of the new arrangement is to get his pension money, in which case it probably would be a sham. On the other hand, selling out of his interest in the practice seems like a very drastic step just to get his pension money, so perhaps OP's framing of the issue is not correct. Maybe he just wants "out," but the most convenient way for him to continue to his personal practice is as an IC working through the group practice, or maybe not even an IC but just as a tenant. The devil is in the details.

Perhaps he is contemplating a new relationship to the plan sponsor as an independent contractor, rather than a partner or employee, in which case the answer may be different. (Note: Physicians and other professionals have a greater leeway from IRS to be treated as ICs as compared to other workers.)

I don't know the answer, but just for "laughs" what is the total of QNECs plus the earnings component? This kind of ridiculous windfall demonstrates a serious deficiency with EPCRS.

Now I am very confused. Who is the debtor and who is the note-holder?

There is no clear answer. Assuming there was no 5500 subject to the audit requirement (and it would be shocking if the auditor missed this), I would feel comfortable advising client to file only one corrected 5500, which would be for the py that ends in the last calendar year for which one has already been filed (e.g., 2009 or 2010).

How is either plan a party-in-interest?

I think you need to do both: send a notice w/ding the first one and send a new timely notice when the time is right.

I am not aware of any other guidance, unless IRS said something in the preamble to the proposed or final 414©-5 reg that could be pertinent to taxable non-profits. Prior to the ©-5 reg, my position was always that there was no way the IRS could attempt to apply controlled group/common control principles to non-ownership entities, taxable or tax-exempt, to lead to an adverse tax result (e.g., plan disqualification) because there was no regulation (let alone statute) authorizing that. On the other hand, while not "precedent," I felt that someone who wished to apply control group principles under the rationale of the GCM and PLR could do so, as long as it was done consistently, and it was unlikely the IRS would have the stomach to take a position contrary to the GCM and PLR. Unless IRS has revoked the GCM and PLR, which I don't recall happening, I think you're in the same position with your situation.

Pennysaver: Not sure if Quagmire was trying to convey the same message, but if the entity is not tax-exempt under 501(a), you ignore the ©-5 regulation and just work through the 414(b) and © normal rules (although you may then wish to consult an IRS GCM and private ruling issued in the 1980s that were the genesis of the ©-5 regulation). Don't take this the wrong way, only trying to be helpful, but are you sure that the entity is not tax-exempt under 501(a)? In other words, if it is not exempt under 501©(3) as a charity could it be exempt under some other provision of 501©? Does it actually file a Federal income tax return and pay tax?

If the settlement is a mutual fund market-timing settlement, there is specific DOL guidance (probably what was summarized in the ASSPA article). Second, payment of reasonable expenses presupposes that the plan documents permit expenses to be paid with plan assets, and if they do that's good enough even though the employer's normal practice may be to pay the expenses with non-plan funds. DOL wasn't breaking any new ground here.

The mistake (by the IRA owner's lawyer?) was not accounting for the MRD (and the reduction in assets attributable to the tax liability) before splitting the IRA 50-50.