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.

The section of your plan document addressing the trustees' roles should address how multiple trustees can act. In my experience, many plans will allow either one to act on their own, but that's not universal.

I think you can still exclude John Doe moving forward because you're not excluding him based on his service (instead his job category). Even if you want to keep him in, and exclude only future cashiers, generally we'd write the exclusion as something like "All cashiers hired on or after xx/xx/xxxx."

Someone can correct me if I'm misremembering, but isn't the 1,000-hour "once-in-always-in" rule a function of Code Section 410(a) such that the employee cannot become ineligible solely based on working under 1,000 hours in a subsequent year? I don't think this would restrict you from saying, moving forward, everyone in a particular job category is excluded from plan participation, regardless of how much they have worked, past or present. In other words, you wouldn't be removing them from eligibility because they worked under/over 1,000 hours; you would be removing them from eligibility because of their job category.

Even though Code Section 401(a) applies to several types of qualified plans, usually when someone refers to a "401(a) plan" they are talking about a governmental defined contribution plan. The 401(a) plan usually holds the governmental employer's match based on employee deferrals to a 457(b) plan, but can also hold employer non-elective contributions and employee after-tax deferrals.

No, you're right, I ended up finding that in a different section a little later. Thanks. I'm not sure that solves the underlying question about the basis in the statute/regulations, but it is there in our pre-approved document.

As MBESQ notes, you'll likely get different opinions on how much flexibility the anti-cutback exception allows. My own personal rule of thumb is to amend the distribution policy only for payment events that occur after the change in the policy (not all payments that occur after the change in the policy). So, for example, if your policy currently pays five installments starting the year after termination, and you want to change it to five years after termination, I typically would say for anyone who terminates on or after X date, the new payment rules apply. I think it's too messy if someone is mid-stream under the current rules and you try to impose a delay. You'll have a short run-off period where people are getting paid under different sets of rules, but it's always made the most sense to me.

Generally, if you terminate the plan in connection with the CIC (30 days before closing through 12 months following closing), all distributions must be paid within 12 months of plan termination. This gives you some - but not much - time to stretch out payments. For example, if the CIC occurred today, you could terminate the plan on, say, January 10, 2026, pay half the account balances during 2026, then pay the other half on, say, January 8, 2027. (The participants cannot have control over when they are paid.) That at least covers two taxable years, and gets you out of the year of the CIC if any of the plan participants got payouts at closing that boosted their income in 2025. Outside of that, there's no possibility to roll over or pay longer installments, unless someone knows something I don't. Anything that would stretch payment out further (e.g., buying an annuity) would not help from a tax perspective.

Thanks for the thoughts, all. For what it's worth, I completely agree. This is how I've always understood and implemented it, but just never had a reason to look at the underlying statute for the source of that rule.

Thanks Paul. This has been my experience too, but like I said I can't find a satisfying answer yet as to why. Client's issue has been resolved, so it's more curiosity on my part at this point. Section 411(a) does not have any reference to "active" participation. Neither does the definition in 411(a)(8), which speaks only to the "fifth anniversary of the time a plan participant commenced participation in the plan." In my case, the participant still has an undistributed (and vested) balance, which I think still makes them a plan participant, so I don't see anything with Section 411 that stops the five-year clock from running. For a few reference points, the FIS Relius pre-approved document doesn't draw any distinction in NRA regarding active participation. The ERISApedia Qualified Plan book confirms the NRA rule is based on passage of time (not years of vesting service), which is not quite on point. Other resources mention an "active" requirement to attain NRA, but the only citation is to 411(a) and 411(a)(8), which I don't read as imposing an active service requirement. Perhaps there's a cross-reference or other rule that governs the outcome that's outside of Section 411. In any event, would be interested in anyone has more insight here.

Thanks. Everything in me says "no" but I can't quite put my finger on why that's the answer. Plan document just says full vesting at Normal Retirement Age.