EBECatty

I agree but probably couldn't put my finger on anything specifically saying as much. As Artie notes, the three-year restriction deals with plan terminations and liquidations that accelerate payments to a date earlier than the date they otherwise would be paid under the terms of the plan. It could depend on the plan terms. In addition to Artie's example, say a plan provides that if an employee meets a performance target over years 1-3, she will receive deferred payments in years 4-10. If the employee doesn't meet the performance target by the end of year 3, the plan expires and no payments are made. If the target isn't met and the plan expires, I'd have no problem starting a new, identical plan the first day of year 4.

Kind of like "fringe benefits" - however you want to define it?

I don't have a great answer, other than to use it in a way that makes you comfortable based on the individual fact pattern. It's sticking in my mind that the use case was something like having a fixed 4% profit-sharing contribution but increasing it to 5% for everyone after the end of the year, but the statute doesn't describe it that narrowly or say that every participant must get an increased benefit. The relevant text is: "...an employer amends a...profit-sharing...plan to increase benefits accrued under the plan...".

Newly enacted Section 401(b)(3) (Section 316 of SECURE 2.0) might help you here.

I haven't had reason to come across this before but it's an interesting question. I also don't see an immediate answer unless I'm missing something obvious. I think the issue is whether a family member of a 2% S corp shareholder is simply an "employee" under 54.4980H-1(a)(15) or whether stock attribution makes the family member a 2% shareholder as well. I don't see anything in the ACA statute or regulations referring to an attribution system to use for this purpose. The regular 2% S corp shareholder fringe benefit rule is in Section 1372 and says that, for purposes of applying the fringe benefit rules under Subtitle A (Income Taxes), a 2% S corp shareholder is deemed to be a partner and that Section 318 attribution applies. But the ACA excise taxes are found in Subtitle D (Miscellaneous Excise Taxes). Would be interested to hear if others are aware of something on point.

Thank you both. That was my initial reaction as well but wanted to confirm. @CuseFan, the plan document only says that 415 excesses must be corrected in accordance with EPCRS (which, to me at least, is not as clear as it could be on this point).

Say in 2025 a participant under age 50 defers $23,500, receives a non-SH match of $11,750 (match formula of 50% of all employee deferrals), and receives a PS contribution of $40,000 for a total of $75,250 and a 415 excess allocation of $5,250. Under EPCRS Section 6.06, the reduction would come first from unmatched deferrals (none as 50% of all deferrals are matched) and then from matched deferrals and the corresponding match. In that scenario, is the correction: Refund $3,500 of matched deferrals to the participant, and (2) transfer $1,750 of matching contributions to the plan's unallocated account; or Refund $5,250 of matched deferrals to the participant, and (2) transfer $[edit: 2,625] of matching contributions to the plan's unallocated account? In other words, does the "corresponding match" also count toward the 415 reduction (as in the first scenario)? Thanks in advance.

Have you looked at Q/A 24(b) and example 2? Might get you close to where you need to be, particularly if the time/amount of the future payment is not reasonably ascertainable. Or whether there is an exemption available, including a shareholder vote? If the shareholder vote is available, just list the full account balance and have them approve the payment. A few extra pieces of paper but solves any calculation misstep.

Nothing specific I'm aware of or that I see on a quick pass. 1.421-1(h) defines the "employment relationship" required for the limitation that ISO recipients be "employees" on the grant date, but there's no firm line on hours or level of service. The three-month post-termination rule in 1.422-1(a)(i)(B) is vague as well. The IRS has used the 409A standard in other contexts - "sham" terminations for DB plan purposes, if I recall - so it may still be a good rule of thumb.

Agree with Bill. The test under 414(s) is not how close the two percentages are, but rather whether the HCE percentage of total compensation exceeds by more than a de minimis amount the non-HCE percentage. In other words, you only have a 414(s) failure if the HCE percentage is too far above the non-HCE percentage. The other direction doesn't matter. 1.414(s)-1(d)(3): Nondiscrimination requirement—(i) In general. An alternative definition of compensation under this paragraph (d) is nondiscriminatory under section 414(s) for a determination period if the average percentage of total compensation included under the alternative definition of compensation for an employer's highly compensated employees, as a group for the determination period does not exceed by more than a de minimis amount the average percentage of total compensation included under the alternative definition for the employer's nonhighly compensated employees as a group.

Interesting question. You may need to check the details as it's been several years, but if I recall correctly, a sale of a subsidiary can constitute a separation from service even if the target's employees remain employed by the target post-closing. The theory is they separated from service with the controlled group "Employer" at the time of sale, as long as the buyer does not assume the target's plan. Might this let you have the seller terminate Company B's plan the day before closing, then distribute based on the target employees' separation from service at closing (instead of distributing based on a plan termination, which is all the successor plan rule would prohibit)?

Thanks, Artie. That's helpful. I had always read that provision as allowing for re-deferral or imposition of new vesting conditions by the buyer, but a second look may cover earnout payments that are sufficiently contingent (e.g., an earnout based on post-closing financial performance, but not necessarily a deferred portion of the purchase price not subject to a SROF). Appreciate it.

I'm curious to hear others' thoughts on the interaction of the short-term deferral exemption with the earnout provisions of 409A. Say an employee has an agreement that pays out the full value (i.e., not a SAR) of 1,000 shares of company stock upon a change in control, but only if the employee is employed on the date of the CIC. Clearly a short-term deferral. What if the agreement also uses the earnout provision for transaction-based compensation, allowing the employee to receive contingent payments over the next five years as and when the selling shareholders receive them? The employee does not need to remain employed for the next five years. This seems to add a deferred payment that would blow the short-term deferral exemption. (I'm not sure each separate earnout payment would be considered subject to a SROF on its own.) The earnout provisions, as I read them, do not exempt the arrangement entirely from 409A, but rather say that the payment timing will not violate the initial deferral election rules or the fixed time of payment rules. In other words, the series of earnout payments will be deemed to comply with 409A. The proposed regulations address this issue for stock rights and allow them to remain exempt from 409A even if they include an earnout provision. But what about a short-term deferral?

I think the concept is fine. For testing purposes, this should produce a uniform dollar amount of contribution for all participants, so would meet the safe harbor.

A true partnership profits interest generally must be granted in connection with the performance of services to or for the benefit of the partnership, at least to fit within the IRS's safe harbor. You could grant a partnership interest that looks and acts like a profits interest to a non-service provider, but they wouldn't have the benefit of the safe harbor that most profits interests are structured to comply with. Generally, I see appreciation rights to non-service providers (i.e., lenders, investors, etc.) in the form of warrants.