EBECatty

Is anyone aware whether, for purposes of the special catch-up contributions, a non-governmental 457(b) plan can define "normal retirement age" at less than age 65 where the sponsor has only a 401(k) plan (with a normal retirement age below 65), and not a DB plan or money purchase plan?

I've seen a few before, but was concerned they weren't comprehensive. I can't seem to pull them up now. They asked about family relationships for attribution, but didn't consider some of the more complex rules like excluded stock. I would be wary of relying solely on a spreadsheet unless it takes all the rules into account (or you use it only as a starting point). Also I don't think they accounted for the affiliated service group rules. Too many variables in my opinion, unless you are using it only for an initial assessment that's going to be vetted afterward. Or maybe you all have access to better versions?

I always wonder about this question. All the NQ plans I've encountered with outside recordkeepers, rabbi trustees, or employer-owned custodial accounts usually run the distributions through the employer's payroll. Often I'll see the employer request a check from the trust/account payable to the company, and the company in turn issues a check to the employee through the company's payroll. Or sometimes issues the check first and then requests reimbursement from the trust or custodial account.

Mine are all non-governmental as well.

As far as the number of individual accounts, I'm not entirely sure as I'm removed from that level of detail. I've seen some where they maintain separate accounts (whether physically differentiated or just recordkept separately, I don't know) for each participant, but my sense is that's usually where there are 457(b) elective deferrals as opposed to, say, one 457(f) employer contribution going in at the end of each year. Regardless all the assets whether (b) or (f) are in the same place, just tracked separately at the employer-level for vesting, (b) limits, etc. I'm not sure if it's just the plan structure, but our clients generally are able to get properly valued account balances with investment gain/loss more frequently, usually at least monthly.

I generally see combo 457(b)/(f) plans commingle all investments in one rabbi trust and track the (b) vs. (f) balances separately in recordkeeping.

Bumping this up - any thoughts?

1. I don't see this addressed anywhere in the proposed 457 regulations (or existing regulations or 83 regulations for that matter). There's a somewhat bright-line rule requiring two years of services to create a substantial risk of forfeiture under 457(f). However, there's no mention of how long a non-compete must last. I would imagine the IRS would disregard a very short non-compete, e.g., you retire on December 31, 2017, and have a non-compete that lasts until April 1, 2018, at which point you are paid. Is anyone aware of any guidance in the form of PLRs, conferences, private conversations, etc.? 2. Under the proposed regulations, I don't see anything that would prohibit entering a non-compete for the first time upon termination and relying solely on the non-compete to create a substantial risk of forfeiture. For example (assuming you meet the new non-compete conditions for legitimate interests, enforceable agreement, efforts to enforce) an employee voluntarily terminates with no deferred comp plan in place. In connection with the termination, the employer offers a five-year non-compete with payments of $100,000 for each year that the employee complies with the non-compete. I don't see anything that requires substantial services before the non-compete to create a substantial risk of forfeiture for the payments during the non-compete period. Thanks in advance!

Thanks. Is there a protocol I missed on cross-posting?

Say you have a KSOP in a privately held company. The stock in the ESOP portion is fully allocated and the employer doesn't anticipate contributions for at least the next several years. The 401(k) portion allows deferrals and also has a discretionary match and discretionary profit-sharing. I understand the 401(k) side of the plan won't violate the "substantial and recurring" contribution requirements even if the employer makes no PS or matching contributions. Does the same logic extend to the ESOP portion of the plans? I'm having difficulty pinning down exactly what constitutes "the plan" here. Is it the entire KSOP plan collectively? Does the ESOP portion need to be separated from the 401(k)/PS side of the plan? Any cites (formal or otherwise)?

Say you have a KSOP in a privately held company. The stock in the ESOP portion is fully allocated and the employer doesn't anticipate contributions for at least the next several years. The 401(k) portion allows deferrals and also has a discretionary match and discretionary profit-sharing. I understand the 401(k) side of the plan won't violate the "substantial and recurring" contribution requirements even if the employer makes no PS or matching contributions. Does the same logic extend to the ESOP portion of the plans? I'm having difficulty pinning down exactly what constitutes "the plan" here. Is it the entire KSOP plan collectively? Does the ESOP portion need to be separated from the 401(k)/PS side of the plan? Any cites (formal or otherwise)?

I was working with a 457(f) plan just yesterday that vested an executive in 15 annual installments upon reaching age 65 while employed. The plan made a tax distribution upon vesting to cover the present value of the 15-year payout. I didn't design the plan, but there are definitely some out there that don't meet the short-term deferral exception.

I recommend waiting until at least verbal approval from the VCP reviewer before calculating and depositing corrective contributions. Unless the amount at issue is astronomical, the additional earnings generally are fairly small relative to the overall costs. The VCP process also seems to be going faster now than before, so the cost of waiting is decreasing. I've had one case where a VCP reviewer wanted us to correct in a less-expensive way. The procedures for the correction are clear in EPCRS and the regulations, but the reviewer initially wanted us to correct using another method that would result in smaller contributions but in my mind was incorrect. The difference between correction methods was immaterial (a few hundred dollars in a correction totaling tens of thousands), but I advised my client to use (and had to convince the reviewer to accept) the more expensive correction. Even if the reviewer wants more money put in the plan, you still need to do another round of calculations and earnings, make deposits, draft and send additional participant communications, field phone calls from confused employees who thought you already corrected the problem, etc. There are hard costs involved in re-calculating everything as well, like revising the VCP narrative to reflect the different contribution amount, earnings deposit date, etc. As a lawyer, my response to the client almost always includes something along the lines of: "If the recalculation process adds an hour or two at my billing rate, you're probably losing money."

Thanks XTitan. Maybe I'm being dense, or misunderstanding the regulation, but I think that only gets me halfway there. Employer 2's employees won't be affected because they did not undergo a change in control. However, considering the post-CIC service recipient (say it's a merger so Employers 1 and 2 are now the same entity) as the service recipient for aggregation purposes, wouldn't Employer 2's plan have to be terminated because it would be aggregated with Employer 1's plan if Employer 1's employees participated in Employer 2's plan? Or are you reading the term "with respect to each participant" as saying the "plan" to be aggregated is the individual participant's "plan"? Appreciate your feedback.

Say Employer 1 sponsors a typical NQDC account balance plan with salary deferrals and potential employer matches/contributions. A handful of executives are eligible and participate. Employer 1 undergoes a change in control through merger into Employer 2 or by becoming a wholly owned sub of Employer 2. Employer 2 sponsors a similar NQDC account balance plan with salary deferrals and employer money. Employer 1's plan is not terminated prior to the change in control. Employer 2 would like to terminate after the change in control (but within 12 months) and liquidate the plan balances in Employer 1's plan. The executives eligible for Employer 1's plan will then become eligible for Employer 2's plan. The post-CIC termination regulations define the service recipient as the post-CIC employer/controlled group. They also say all plans of the post-CIC service recipient group that would be aggregated if the same person participated must also be terminated. However, the rule only applies to people actually affected by the CIC (Employer 1's employees). Post-CIC, Employer 1's and Employer 2's plans would be aggregated if Employer 1's employees participated in Employer 2's plan. I'm unclear on how you aggregate here: Does Employer 2's plan have to be terminated as liquidated as well? Even if the rule only applies to people actually impacted by the CIC (all Employer 1 employees) the two plans would still be aggregated and the regulation seems to require termination of all post-CIC aggregated plans. If that's the case, do you simply have to freeze Employer 2's plan and let it pay out over time?

I've done this before (for different errors) and it wasn't a problem. Make sure the DL application clearly says you've submitted through VCP as well.

As a matter of practice, I've written into the plan document that the company will only pay the premium (and any gross-up bonus) if the employee is actively employed on the premium due date. That way each premium payment is subject to a SROF until made. It doesn't guarantee the employee all premiums will be paid, but is a fair balance in my opinion.

I've set up a few of these for clients who have already been persuaded by their brokers, but only for 1-3 employees at a time. I would avoid setting them up for anywhere close to 150 employees. There are some open issues, but to my knowledge they have never been a high priority for enforcement. The biggest open issue in my view is whether these plans are: (1) annual bonus plans not subject to ERISA at all (2) ERISA welfare benefit plans in which the company is helping the employee buy life insurance (3) ERISA pension plans If you don't have any restrictions, i.e., company pays premiums each year and employee can do whatever he/she wants with the policy, I think you fall closer to (1) or possibly (2). The more "retirement-like" restrictions you add, e.g., restrictions lapse only upon termination of employment following age 65 or 10 years of service, the more likely you are to fall under category (3). Retirement-based restrictions on 150 employees starts to look an awful lot like category (3). If they are pension plans, and paying into the policy makes them "funded," they violate a number of ERISA requirements. I've never seen an official pronouncement on their status, but the insurance marketing materials always include a disclaimer saying "talk to your tax and legal advisers to ensure you are not creating an ERISA pension plan, etc." That risk will always be inherent in the REBA plan design, but they are sold nonetheless. With regard to vesting, the materials I've seen label the process as "vesting" but are really gradually reduced repayment obligations if you leave prematurely. The company also won't be able to deduct any premiums if the company's repayment right can be enforced against the policy (and arguably if the repayment obligation is based on the cash value of the policy). If you can stomach the risk, they are useful plan designs.

The new Rev. Proc. eliminated the 50% refund for anonymous submissions failing to reach resolution, which I use on occasion. Always thought this was a good feature in iffy cases, so that's unfortunate.

Say employee works for Corporation A. His employment agreement is only with Corporation A and he only performs services for Corporation A. He owns a portion of Corporation B. Corporation B is in a brother-sister controlled group with Corporation A based on overlapping ownership. Both corporations operate in very similar industries, just different aspects of the same industry. Corporation A's employment agreement provides a change in control payout to employee if Corporation A undergoes a change in control. Corporation A also wants to give employee a change in control payout if Corporation B (which employee does not work for, but owns part of) undergoes a change in control. Assume the payment (withholding, taxes, reporting, etc.) comes from Corporation A. I don't think the change in control of Corporation B would be a 409A-permissible payment event for the employee of Corporation A. The "relevant corporation" rules are defined in terms of "corporations" and do not seem to extend to other members of the "relevant corporation's" brother-sister controlled group. However, the definition of "substantial risk of forfeiture" speaks in terms of a business-related condition of the "service recipient," which does include brother-sister controlled group members. That would seem to allow short-term deferral treatment as long as the payment is shortly after the change in control. Assuming there's actually a substantial risk that Corporation B will not be sold, thoughts on using the short-term deferral rule by saying the successful sale of Corporation B is a business-related goal of the entire controlled group, which is the relevant "service recipient"?

I can't say I have heard anything definitive one way or the other. I have taken the position you mention, albeit not in front of the IRS, to correct missed deferrals for terminated employees. Seems they would be hard pressed to argue you haven't fully corrected when there is nothing left to correct.

Appreciate your thoughts. The goal would be for each separate entity to contribute any employer contributions, handle distributions and reporting through its own payroll, etc. Essentially each entity would be responsible for its own employees, but hopefully under one umbrella plan document. I think it would work if the plan document contained standard terms, then added a separate section with definitions and terms specific to each entity. Or, if they will be consistent across each entity, one section with definitions and terms specific to all other non-controlled group entities. Would need to confirm all the operational rules mentioned above conform.

Section 409A will impact the operation for sure, but my question was more fundamental than 409A. I'm familiar with the 409A-specific rules that could apply here, for example, identifying the relevant corporation for a CIC, lower threshold for ownership when determining service recipient for purposes of separation from service, etc. There are some other issues where I think it's not as clear-cut within 409A--basically most other references to "service recipient," which includes only employers under common control. Those will all drive some details of plan drafting. I guess I was hoping for input on whether there are more fundamental reasons a non-controlled group employer couldn't participate in the parent's plan, whether anyone's seen this setup before, how did the document look, and so on. If this won't work, the only other real option I see is setting up separate NQDC plans for every subsidiary, which doesn't sound very appealing.

Employer has a nonqualified plan with salary deferrals and some employer money. They also have several subsidiaries that are owned 50-80% and therefore not in the same controlled group. Can key employees of the subs participate in the parent's plan? All taxes run through the payroll system of the entity actually employing the employees, i.e., subsidiary payments processed and reported through subsidiary's payroll, not parent's. Can the subs be drafted into the plan document's eligibility terms? Separate participation agreements?

Thanks jpod. I'm not familiar with what the final regs are anticipated to say, but are you saying they will carve out a short-term deferral similar to 409A and 3121? I'm thinking if you retire in June 2016, the financial goals are met on December 31, 2016, but you're not paid until March 1, 2017, wouldn't that be a deferral of compensation (without some exception)?