Locust

401 Chaos - you might want to review the 5500 and 990 instructions as they are fairly specific about what to report for VEBA termination, and I believe a description of the final disposition of assets and the distributees is required.

I wwork with old documents that say that hours of service will be credited for an unpaid leave of absence, provided that the company's leave of absence policy is administered in a nondiscriminatory manner. This would apply to all unpaid leave of absence, not just maternity/paternity. Is this allowable? Also, some of the plans say that hours are credited only in the year in which the unpaid leave of absence begins. And some say that the hours are credited only if the employee returns to work at the end of the leave. Does any of this make sense?

I'll wade in here with a few brief comments that may reveal the depth of my ignorance on these issues: 1. It was my understanding that nontaxable welfare benefits are not an issue, so payment of COBRA premiums or health premiums would generally not be an issue (unless you had a discriminatory self-insured plan). 2. So far as reimbursements, I thought what was going on there was that the company could reimburse actual expenses that would not necessarily be incurred, and if they were incurred, they would be of an unknown amount until incurred, such as travel, legal expenses. Those can be reimbursed within a certain period of time after being incurred. Those are taxable benefits, but I wouldn't call these welfare benefits. 3. Taxable welfare benefits, such as life insurance that isn't subject to the ss 79 group term life insurance exclusion, would be deferred compensation, unless they fall within some sort of exclusion, such as the 2 x pay/2 year exclusion for separation pay. So for example, if an executive was receiving life insurance that had a value of $1000/month and that was payable for 10 years, that $1000/month would be deferred compensation. That's ok because it's being paid at fixed times, but it may run afoul of the 6 month rule for specified employees.

I would add that the fiduciary could set up a loan approval procedure so that it can be processed by a recordkeeper as a ministerial function. In other words, the fiduciary would direct that a loan be issued if the recordkeeper receives a complete application form that meets the conditions for the loan set up beforehand by the fiduciary. The recordkeeper is processing the loan, but the fiduciary through adoption of its loan procedures is approving the payment.

You didn't say whether there were any other documents, such as employment agreements, election forms, employee communications. Before sending anything in to the IRS I'd want to see what was there. 457(b) says simply that you have to have "a plan established and maintained by an eligible employer," and the regulations expand on that to say it has to be written and has to contain all of the material terms - it's possible that an election form, summary or letter to the employee would meet the plan document requirements. It depends on the client how far to take this.

I think it depends on the specifics. Does the vacation have to be used in the year in which it was bought? If so definitely not deferred compensation. But what if it can be accumulated and delayed until requested and never forfeited? I would think that would be deferred compensation - it's no different than deferred compensation except for the label - and wouldn't meet the basic 409A requirements.

1. All - This has been a very helpful post. Thanks for sharing your thoughts/expertise. 2. It's interesting the way you (fts) put the statement that the 2.5 rule doesn't apply to elective deferrals. At first I thought that's not right, but you are correct because elective deferrals will always be 100% vested - the IRS doesn't recognize vesting conditions on elective deferrals. With the upcoming round of guidance on 457, it seems likely that there will be no more elective 457(f) arrangements. 3. Mr. Kite - I don't see a conflict on the tax treatment of earnings between the 457 and 409A regulations, because Reg. ss 1.409A- 3(e) does not relate to the taxation of the payments, but only to the timing of payment elections. 1.457-11(a)(4) controls I think at least until we get new guidance under 457.

A SEP must cover all employees of the employer, and for this purpose the employer includes all members of the controlled group (Code 414(b) and ©), so there can't be a valid SEP that allows the exclusion of nonadopting companies. If you don't want the SEP to cover the new company's employees after they have met the eligibility requirements, the company will have to discontinue All contributions to the SEP.

Q - So you knew exactly what 457 meant when it used the term "substantial risk of forfeiture," even though there was no definition (other than the ss 83 definition that is different from your understanding) and no IRS guidance and no IRS enforcement? Wow! I salute your extraordinary abilities! You ought to be picking stock. L

jhall - I still think that you may have to aggregate all severance payments, including those made within the ST deferral period, in applying the 2 x limit under the 2 year rule. Under your scenario, this would mean that the amounts in excess of the 2 x limit would be subject to 409A and the discretion to accelerate would result in 409A taxes on the amount in excess of 2 x limit that are not required to be paid within the ST deferral period. So if you had $1 million due on severance payable within 30 days, and $450,000 payable at the company's discretion over a 2 year period, you'd have $1 million in excess of the 2 times limit, but only $450,000 would be subject to the 409A tax. See Reg. ss 1.409A-1©(2)(D) "All deferrals of compensation with respect to that service provider under all separation pay plans [with certain exceptions]. . are treated as deferred under a single plan." So far as what Hogan says, I wasn't there, and I haven't seen any reference to a section of the regulations that would allow a bifurcation of separation pay for purposes of the 2 year rule.

Q - Your characterization of those who were aggressive as knaves is overly harsh. Some might charactize them as smart and helpful. With 457 and deferred compensation generally there was no IRS guidance as to what these various terms meant and no real enforcement. A certain percentage of taxpayers in this situation will want to be aggressive. In retrospect the aggressive taxpayer was rewarded and in a sense was "right" because the grandfather rules of 409A have pretty much approved everything that was done before 2005, and the grandfather rules of 457 will likely approve everything that was done before some date in 2007.

mpslaw - that's a good point. I haven't looked at the language that closely (that's obvious) but I would think the relevant date would be the date of the publication of the Notice - sometime shortly after July 24. I wouldn't want to count on the availability of the old SRF standard for elections made after that date - in other words you couldn't add a noncompete or extend a vesting period after that date. But maybe that is being too conservative - I suppose you could tell the client to try for it in this period before the rules are actually issued with the caveat that he or she may have to give it up. L

You have to stay in business and when you're just starting out, you'll need everything you can get. Your established competitors are taking full advantage of every compensation opportunity, and if you don't they will either underprice you or get paid more for the same services - in either case that puts you in a bad competitive position. I would do what everyone else does, provided of course that you treat your customers fairly. I am not in your business (thank you thank you), but my impression is that TPAs and investment advisors oo not disclose actual amounts received, but disclose only that they have arrangements that may result in additional payments. I'd want to get as much information as possible about what others are doing. The herd principle (do what everyone else is doing and you're probably ok) applies here. This forum won't give you the information you need - join an association of your peers.

mjb - I don't know about any tax court ruling, but to set up a shell LLC and do whatever you couldn't do in the IRA in the LLC makes a mockery of the rules. Could such an LLC loan its funds to the owner of the IRA? There are lots of concepts in ERISA and the tax law that could be used to attack such a blatant attempt to avoid the restrictions on self-dealing. On the other hand it is clear that an individual account plan of a company may under ERISA and the Code invest in the sponsoring corporation's common stock (employer securities).

I think it can be done with the rollover into a corporation plan, but I would be uncomfortable with the IRA/LLC investment suggested. I agree with Fiduciary Guidance that you ought to get a lawyer - someone who'll take responsibility if the thing is ever questioned. My guess is that organizations mentioned will set it up for you, but the main thing they want are the ongoing fees for administration, and they'll probably disclaim any responsibility for the legality of it.

The IRS has said an investment by an IRA in a company in which the owner of an IRA is an employee could be a prohibited transaction if the investment benefits the owner of the IRA in a way other than as an investment. For example, suppose as the result of the investment the IRA owner was made a director or a manager. It seems to be a factual issue that would be hard to identify definitively.

Transfer from a 401(k) plan to a nonqualified plan would be a reversion to the employer that is absolutely prohibited.

Thanks QDROphile - it looks like the IRS is going to define SRF for 457 consistently with 409A - so the rule will be clear then. Here is an excerpt from the notice you mention Q - Excerpt from 2007-62 "The Service and Treasury anticipate that upcoming guidance under section 457(f) will generally adopt the rules relating to substantial risk of forfeiture that are contained in section 1.409A-1(d)." I guess that settles it, unless I were to argue that this notice simply indicates an intent to change the rule - let's not go there. Thanks for the learned discussion.

mjb - I agree that there is nothing in 457(f) or the regulations that defines "substantial risk of forfeiture." However, application of the 83 definition, which was the only definition around when 457 was enacted, was the standard that was used. When 409A was enacted, Congress stated that the IRS should develop definition of SRF for 409A that was more rigid than the 83(b) definition, thus the rule under 409A that a condition requiring an employee to refrain from service will not be a SRF. As the 409A definition was supposed to be a change for 409A of the definition that had applied before, I don't think that definition will apply to 83 or 457(f), which will retain the current 83 definition until the IRS changes it. Also, the examples under 457 regs show is that if property is transferred, 83 applies, but they don't indicate that the SRF definition under 457 and 83 are different.

mjb - The assumption before 409A was that the 83(b) definition of SRF would apply to 457(f). Reg. ss 1.83-3© defines SRF as including conditioning a benefit "upon the future performance (or refraining from performance) of substantial services." The parenthetical phrase is the basis for saying that a legitimate noncompete could be a SRF. QDROphile - I don't think 409A changes the rules of 457(f) that say when deferred compensation of a nonprofit/governmental is taxed (unless 409A is violated). In other words the 409A definition of SRF does not change the 457 definition of SRF, and under the 457 definition a covenant not to compete might still be an SRF. As I mentioned, I think you could have rolling vesting, only it would have to meet the 12 mo/5 year rule applicable to changes in payment dates.

It looks to me that under the final 409A regulations, a noncompete condition will work to delay taxation under 457(f) and can be structured so it won't violate 409A. For example, if an executive will be paid in 5 annual installments following separation from service provided he meets a noncompete provision that is a SRF under 457(f), he won't be taxed until each payment that coincides with the lapse of the SRF. The SRF delays taxation until lapse, and it meets 409A because the payments are fixed dates. The timing of taxation is determined under 457(f), and it meets the payment timing rules of 409A. But it doesn't look like rolling vesting works unless the election to change the vesting date coicides with the 12 month/5 year change of election rules. So the executive who was to be vested in 2012 at the end of his employment contract can change the vesting date only if the new agreement is made by 2011 (12 months before vesting) and if the payment date is no earlier than 2017. [This assumes that rolling vesting is a valid concept under 457(f).] If the change is made under the 12 mon/5 year rule, it meets the payment timing rules of 409A. If it doesn't meet those rules, it violates 409A and taxation occurs under 409A even if it wouldn't have been taxed under 457(f). Do you think this is the way that noncompetes and rolling vesting will work in an ineligible plan post-final 409A regulations?

Severance is payment on an involuntary termination of employment for a limited period of time. If the payment is made even if the employee voluntarily terminates, it's not a welfare benefit but a retirement benefit. If it is paid over an extended period of time, it is not a welfare benefit but a retirement benefit. Under ERISA a pension is a benefit (other than a welfare benefit) that commences following termination of employment that is not a severance benefit (see above). It gets complicated in the VEBA context when severance is set up by business owners. They will call it a severance benefit all day long, but in the end it is highly unlikely that the owner will give up the assets held in the VEBA - the owner will either consider himself terminated and eligible for the benefit, or he will terminate the plan and pay out the benefits to employees (namely the owner). I can see how the IRS would assume a severance plan was deferred compensation unless the company can prove otherwise. That proof is certainly there in the union context, and perhaps in a big company with a written ERISA severance plan, but in the small business context - doubtful.

I'm not really convinced - I think it is ambiguous. Here is my message from the other thread. ++++++++++ I think the basis for the aggregation is the definition at 1.409A-1©(2)(D) "All deferrals of comepnsation with respect to that service provider under all separation pay plans [with certain exceptions]. . are treated as deferred under a single plan." I think you have to have this rule, otherwise the 6 month restriction on payments on account of separation to a specified employee (publicly traded cos.) would be too easy to avoid in the context of separation pay plans - the plan would pay the first 6 months of payments by the end of the short term deferral period, then pay the rest after the end of the 6 month period. Also, the 2Xpay/2 year exception would be fairly meaningless - just stick all of the separation pay in excess of 2x pay in the short term deferral period. ++++++++++ What it comes down to is that application of the short term deferral rule separately from the 2Xpay/2 year rule would mean that the 6 month rule is meaningless in the context of separation pay, provided that the payments are completed before the end of the ST deferral period - maybe that's the point. Also, to some extent the 2 X pay rule wouldn't be much. All you would have to do would be to add a clause that said: "notwithstanding the above, if the total amounts promised exceed 2 x pay, the excess amount shall be paid no later than 2 1/2 months following the end of the calendar year in which the executive is involutarily terminated." The result would be that none of the compensation would be deferred and none of it would be subject to the 6 month rule or any other 409A restrictions.

1. The final regs say that installment payments that are not an annuity are considered a "single payment" unless the plan specifically states that each scheduled payment is considered a "separate payment." Reg. 1.409A-2(b)(2)(iii) What does this mean? 2. I have an arrangement where employees elected deferred compensation payments in 5 annual installments. An idea was that the employee could elect to change the payment date on the first installment under the 1 year/5 year rule, so in a sense the employee making that sort of election every year could indefinitely delay payment, with the only downside being that he or she would have to be paid out over 5 years. 3. Now if the installment payments are considered a "single payment," does this mean that the election to delay under the 1 year/5 year rule would mean that none of the installment payments could begin until 5 years after the originally elected payment date, but that the entire thing could be paid as a lump sum then? 4. If the installment payments are designated as separate payments, does this mean that you could get the "rolling" payment effect described in paragraph 3, but that you could never get a lump sum payment unless you elected to get paid 5 years following the end of the original payment period for the last installment? If anyone has thought about this, I would appreciate your thoughts.

steelerfan - I think the basis for the aggregation is the definition at 1.409A-1©(2)(D) "All deferrals of comepnsation with respect to that service provider under all separation pay plans [with certain exceptions]. . are treated as deferred under a single plan." I think you have to have this rule, otherwise the 6 month restriction on payments on account of separation to a specified employee (publicly traded cos.) would be too easy to avoid in the context of separation pay plans - the plan would pay the first 6 months of payments by the end of the short term deferral period, then pay the rest after the end of the 6 month period. Also, the 2Xpay/2 year exception would be fairly meaningless - just stick all of the separation pay in excess of 2x pay in the short term deferral period. LS