EBECatty

Distributions from a nonqualified deferred compensation plan that complies with 409A are W-2 wages in the year paid and are eligible for deferral (assuming the employee is still working). You'd need to check the 401(k) document though as the definition of "compensation" for deferral purposes often excludes distributions from deferred compensation plans. My experience is that most people don't want distributions from one plan re-deferred into another plan.

This was my fear, truthfully. That even if none were filed no one cared because the employee reported the income. The more logical side of me (which I sometimes try to suspend when dealing with matters like this) says the IRS should flag someone reporting W-2 wages if the IRS has no record of the W-2, but I get why that may be difficult, especially in the current year if the employee files their return before the employer files their W-2s.

I'm hoping has input on what would happen procedurally here. Employer distributes W-2s to employees on time. Employees file their individual tax returns, accurately reflecting information on W-2 provided to them, with no problems. (Several hundred employees; not just one or two.) Several years later, IRS sends penalty notice to employer saying SSA/IRS have no W-2s on file for the tax year. Employer insists they were submitted to SSA. Payroll tax reporting was filed and withholding was remitted to IRS during the year in question. My question is this: When the employees file their personal returns showing W-2 wages, but the IRS has no record of that W-2, would that alone generate a letter/error indicating that the IRS's information doesn't match what the employee reported?

Would certainly benefit from some additional guidance. Hopefully we'll get it!

Interesting take, thanks. I don't have any skin in the game either; just trying to understand the right timing. I agree clarification would help, and hopefully we'll get some. I see your point regarding the explicit timing rule in new section 4960 vs. the (existing, and unchanged) definitional rule that 457(b) plan distributions are wages under 3401(a). Under that reading (1) remuneration is anything that falls under a type of pay that constitutes wages (as the term "wages" is defined in 3401(a)), and (2) any item of pay that falls under one of those categories is counted as "remuneration" as soon as it's no longer subject to a substantial risk of forfeiture, even if not paid until a later year. That approach would also seem to include, say, a bonus that is declared and vested on December 15, 2018, but not paid until March 1, 2019. It would be exempt from 457(f) and would be reported for income and FICA purposes in 2019, but would be a type of pay that's defined as "wages" under 3401(a), and never subject to forfeiture, requiring inclusion as "remuneration" in 2018. Seems like it will create headaches if we're counting "remuneration" before inclusion in W-2 wages (and then excluding it when reported on W-2).

Thanks Carol. Glad to hear I'm not losing it... I agree this provides some planning opportunities under 457(f) and appreciate the link. Very helpful.

Hoping someone can help clarify what I think I must be missing. What's the impact of nongovernmental 457(b) plans under the new 21% excise tax on $1,000,000+ of compensation paid by exempt organizations. (All 457(b) distributions are excluded for the "excess parachute payment" tax.) The new Code Section 4960 applies the $1,000,000 excise tax on "so much of the remuneration paid...by an applicable tax-exempt organization for the taxable year with respect to employment of any covered employee in excess of $1,000,000.... For purposes of the preceding sentence, remuneration shall be treated as paid when there is no substantial risk of forfeiture (within the meaning of section 457(f)(3)(B)) of the rights to such remuneration." The term "remuneration" is defined as "wages (as defined in section 3401(a)), except that such term shall not include any designated Roth contribution (as defined in section 402A(c)) and shall include amounts required to be included in gross income under section 457(f)." I've seen a few pieces of commentary saying that nongovernmental 457(b) plan balances will be included for purposes of the $1,000,000 excise tax when they are no longer subject to a substantial risk of forfeiture, i.e., when they become vested. However, the new Code Section 4960 only references immediate inclusion of amounts that become vested under Section 457(f). Separately, deferrals or contributions into nongovernmental 457(b) plans are not "wages" under 3401(a), but distributions from nongovernmental 457(b) plans are "wages" under 3401(a). So it seems to me that all contributions (deferrals or employer contributions) into nongovernmental 457(b) plans would not be included, even when vested if later, but that all distributions from nongovernmental 457(b) plans would be counted in the year of distribution. Am I missing something?

Would not recommend for a one-person plan. We typically file 5310s in one of three situations: (1) terminating ESOP; (2) terminating large-ish 401(k) plan (several million $ +); or (3) client acquiring a company in a stock purchase and terminating seller's 401(k).

I would delay the termination date until closer to the transaction. I'm not aware of a maximum timeframe either, but 3-4 months strikes me as a little long. Also, FYI, I constantly have recordkeepers (providing plan docs) insist that sponsors need to provide 30 days' advance notice to terminate the SH plan, even in connection with a transaction, which is just flat-out wrong. So the misconception is rampant.

Thinking "out loud" here. Say you wanted 6 months with 500 hours (and had the 1 YOS failsafe). Would you keep using successive six-month periods, or flip to the plan year? Say someone's hired on 10/1/18. They work six months through 3/1/19, but don't complete 500 hours. Would you give them another six-month period from 3/1/18 through 8/1/18? Or switch to plan year and look at 1/1/18 through 7/1/18? Or is it just administrative preference?

Yes, but constructive receipt on its own is looser than 457(f) (and proposed 409B) and can defer taxation until payment. So this design would work to defer tax until vesting, but many other types of plans would no longer work, despite the constructive receipt rules being looser than proposed 409B.

My understanding is this fact pattern would get picked up (for both tax-exempt and taxable employers) in the proposed new section 409B. And I think you would still have the deferral opportunity as long as you pay taxes upon vesting, much like the current 457(f) rules. Or am I missing the point of the question?

I've received VCP approval to retroactively switch from prior year to current year for ACP testing. Same facts: Year 1 no match for anyone; Year 2 same match formula for all employees. Year 2's HCE rate was compared to Year 1's non-HCE rate (0%) and ACP obviously failed. Plan passed both Year 1 and Year 2 using current year.

Without the benefit of time to look at the 409A substitution rules, I believe they are broad enough to cover a forfeiture even if it's not voluntary, but could be mistaken. Also, if it's a one-time payment to be made on a fixed date provided the employee is employed on that date, could you use the short-term deferral exemption? If so, you can forfeit, relinquish, replace, substitute, etc.

I think 1.409A-3(j)(1) addresses the situation. May take a few more facts to figure out the answer. If the payment was conditioned on a vesting schedule, but then was payable on separation from service, it looks like it's permissible because the payment event (separation from service) is still acceptable. On the other hand, if the original plan provided a fixed payment date, that probably cannot be accelerated and paid now without causing an impermissible acceleration.

Appreciate the input. It sounds like the moral of the story is there's no perfect solution.

Bad investments is another good point; thanks. I'm still not seeing any bulletproof solutions, but appreciate the input.

I'm trying to figure out the best way to word this arrangement. The underlying concept is pretty straightforward and I have seen it done many times: The employer has a COLI policy (which it owns, pays all premiums on, and is the beneficiary of) that accrues cash value. The employer enters a separate deferred compensation agreement with the employee saying if you work until age 65, the employer will pay the employee compensation equal to the cash value of the policy on the date the employee turns 65. Generally the deferred compensation plan (like all plans) will say the employee has rights no greater than an unsecured creditor, the employer is not required to set aside any assets, etc. Obviously the language is in there to keep the plan unfunded for tax and ERISA purposes, but the deferred compensation plan never acknowledges what will happen if, for example, the employer defaults on premiums, surrenders the policy, draws down policy loans, etc. So the employee could reach age 65 and become entitled to benefits, but the employer could have let the policy lapse years before. There is nothing else stating the dollar amount of the benefit. (I know the agreement can set a fixed dollar amount projected to be covered by the cash value, but they want to pay the cash value, no more, no less.) What's the solution here? Put a restriction on the policy saying the employer cannot surrender, withdraw cash value, or take loans? I think this would be fine as long as it didn't create any rights enforceable by the employee. What if the employer fails to pay premiums and the cash value cannot support the premiums, causing surrender of the policy? Draft the deferred compensation benefit to equal the cash value at age 65 plus any withdrawals or outstanding loans? That still doesn't solve surrender. Take the employer's word? Anything else enforceable by the employee or shielding the policy from the employer's creditors would upset the tax/ERISA status. Thoughts?

You would need to be careful with making a loan that will be offset by future distributions. The 409A regulations generally consider this an acceleration of the future payments. However, payment of FICA taxes (plus income taxes on the FICA tax distribution) is a permissible acceleration event under 409A, so you could probably achieve the same substance calling it an accelerated distribution, which presumably would be offset from later distributions. Or, if it's not much, consider a bonus that would sufficient to cover the FICA taxes.

Under the default FICA rules, yes.

Thanks. I hadn't considered combining those two.

Correct. As a follow-up to your follow-up, I'm a bit confused about the related FICA short-term deferral rule. Using your same facts, FICA taxes would generally be due on all $250,000 on June 30, 2022 (later of the date of services performed or lapse of risk of forfeiture). This is true even if the amount is not paid until February 28, 2023. There's a short-term deferral exception in 31.3121(v)-1(b)(3)(iii), but it defines the short-term deferral period a little differently than 457(f)/409A. It refers to 1.404(b)-1T, but the upshot is that a "short-term deferral" under the FICA rules seems to be defined only in terms of deferring compensation until shortly after the end of the year in which the services were performed (not the later of performance of services or lapse of risk of forfeiture). So if the facts were "remain employed through December 31, 2017, and we'll pay you $10,000 on March 1, 2018," you could choose to pay FICA taxes on December 31, 2017, or March 1, 2018. But the short-term deferral aspect is tied to March 15 following the year the employee performs services, and doesn't seem to allow a short-term deferral based on the year of vesting. Going back to your example, it seems then that the FICA taxes would always be due on June 30, 2022, and you wouldn't have the option to use the FICA short-term deferral even if you wanted. Anyone have thoughts or authority otherwise?

I've seen it done by attorneys on the deal, accounting firms (usually the larger ones like PWC or KPMG), compensation consultants (Pearl Meyer, etc.). Just depends on the context, whose side they are on, and who's most capable of the bunch.

The most recent 401(k) audit I was involved in (a few months ago now) had specific questions regarding family members, related companies, children, etc. The issue may never come up outside of an audit, but I would have a very tough time telling a client to disregard the rule when responding to the audit request just because they don't like it.

That was my reaction after the reading the NRA definition you cite, but it struck me as odd that the regs wouldn't allow for an NRA tied to a defined contribution plan. Here, the 401(k) plan's NRA is 62, but the 457(b) plan NRA now has to be 65. Just seems inconsistent. I couldn't find any guidance issued on the point either. Maybe the IRS views the DB plan NRA as a more "real" retirement date?