EBECatty

Looking for any suggestions on how this fact pattern is typically handled: Tax-exempt entity has an annual incentive plan set up in much the same way as, for example, a public company. There are target financial and qualitative goals then threshold, target, and maximum bonuses. The measurement period is the calendar year. Payouts are made by March 15 of the following year to avoid 409A. Employees must be employed on the date of payment to receive the bonus, so the vesting date for typical active employees is the date of payment. Income and FICA taxes are due and withheld from the payment. No 457(f)-specific problems as the vesting and payment years are the same. However, employees who die, become disabled, or retire (with typical criteria, e.g., 65 with 10 years of service) during the plan year are awarded a pro-rated bonus paid at the same time as the normal payout date. Their otherwise-applicable performance criteria must be met, but they don't have to continue working. The financial performance is determined as of December 31 of each year (but "officially" approved after the close of the year). I don't think this would maintain a SROF until the administrator or committee officially approved the financial results. It sounds like everything is vested (if it ever will be) as of December 31 each year. So do the dead, disabled, and retired employees owe taxes during the plan year in which they die, becomes disabled, or retire?

The adoption agreement will be more important, but I always request conforming language in the loan policy as well if possible. You can add in a catch-all at the end of the loan policy along the lines of "notwithstanding anything else in this policy, loans may be distributed in-kind and directly rolled over to the [acquirer's] plan to the extent accepted by the trustee of such plan." Line 17(f) on the Form 5310 asks whether any distributions will be made in-kind. If yes, you have to attach an explanation and reference the plan section allowing in-kind distributions. The Internal Revenue Manual section on plan terminations (7.12.1.14.2) also directs the reviewer to examine the plan term that allows in-kind distributions, so you need to make sure the terminating plan's adoption agreement allows in-kind distributions.

If it's terminating, you also want to check Plan B to make sure it allows distributions in-kind or loan rollovers. Many pre-approved plans limit distributions to cash only; the loan note that gets assigned is considered an in-kind distribution and direct rollover to Plan A. This is especially true if Plan B will file for a DL after termination and you have to support the in-kind loan rollover as a permissible form of distribution. Most loan policies also result in an automatic default upon termination of employment or termination of the plan, so I would confirm the policy is consistent with what you're trying to do as well.

Shouldn't the nonqualified plan be unfunded, in which case it's just the deemed investment return of publicly traded employer stock?

I see these attempts regularly, and they always leave me uneasy. Generally the date a person has a severance from employment is based on all the facts and circumstances, which I view as the date they stop showing up for work, regardless of how long the employer says the employee will remain active. It may be possible to keep the employer-employee relationship genuinely intact during the severance period, but I think that's the exception rather than the rule. I'm fairly certain the IRS would take the same position in a plain vanilla case, i.e., employee stops performing services on June 22, but continues to receive a paycheck and health insurance until, say, September 30. Employers doing this also need to keep in mind that their health insurer almost certainly deems these people separated for eligibility purposes, meaning the six months of "active employment" while they are getting severance pay will usually be considered the first six months of COBRA if audited by the insurer. Same goes for stop-loss carriers, who wouldn't hesitate to deny a major claim after the first 18 months (regardless of what the employer and employee call it) if the employee falls outside the contract's coverage terms.

Agreed--employee has economic benefit income under the split dollar regs.

Interesting question. I've had similar plans and treated them as phantom stock plans subject to 409A (unless exempt as a S-TD, which they usually are). Treasury Reg 1.409A-1(b)(5)(vi)(E) has a definition of "exercise" that can be applied by analogy to SARs under 1.409A-1(b)(5)(vi)(H). I'd say err on the side of caution and give them a 409A-compliant payment event, which in this case would only be a good CIC definition.

Bumping this up as I'm running into the same situation now. A mid-year reorganization will create several subsidiaries owned <80% by the plan sponsor (who is the current employer for all employees). No ASG. The subsidiaries will keep participating in the plan and it will become a MEP. Any additional thoughts on ADP, top-heavy, etc. and everything else that is tested separately as a MEP?

Thanks jpod.

Thanks. Everything here lines up consistently (SPD, actuary, benefit election forms, participant communications, other portions of plan document, prior plan documents, current and historical operation, etc.). It's a clear and narrow drafting mistake in the plan document, i.e., a classic scrivener's error. There's absolutely no doubt about intent or participant expectations. Also, I am plan counsel; just curious if other folks have had recent experience with whether the IRS will approve these errors through VCP and on what conditions.

I know EPCRS doesn't officially recognize scrivener's errors as such, but will accept a retroactive amendment under VCP to conform the terms of a plan to its prior operations. One of the conditions--which is tough to fulfill in many cases where you want VCP relief to begin with--is that the retroactive amendment not violate 411(d)(6). I'm reading some commentary saying IRS was apparently "considering" its stance on scrivener's errors after the Verizon case, but the new EPCRS came and went without clarifying. Is anyone aware of the current IRS position or willingness to approve, especially where the amendment technically would violate 411(d)(6)?

Unfortunately, you may have just confirmed all three of my concerns. 1. I can't find anything requiring such an election by law. 2. It's not in the plan document. 3. No surviving spouse in their right mind would elect a 50% annuity when a 75% annuity is freely available. I'm trying to determine why it is in the SPD.

I understand from Notice 2008-30 that a QOSA is not required for a QPSA, i.e., if your QPSA is a 50% survivor annuity, you don't need to offer a separate 75% QPSA survivor annuity. I'm looking at an SPD that says, in a pre-retirement death situation, the spouse may be allowed to elect a 75% annuity if the default form of QPSA that otherwise applies is the plan's default 50% QPSA. This language is separate from the provision regarding a participant's election of a higher survivor annuity percentage shortly before the participant's death. Setting aside the plan document, would this election be required by law under any circumstances?

I think it's okay too. In 1.409A-2(a)(2), the regs describe the initial, nonelective, employer-provided time and form of payment as an "initial deferral election" so I think it only makes sense that you can have a subsequent deferral election provided you comply with the delay rules.

So I've always been under the impression that vesting on death or disability retains a substantial risk of forfeiture under 409A. For example, a nonqualified plan says employee will be paid $100,000 provided they are still employed in five years. If they remain employed but there's a death, disability, involuntary termination without cause, or change in control before the end of the five-year period, they vest in the $100,000 upon the first of those events. Payment in any case is made within the short-term deferral period. I've assumed all these conditions would result in short-term deferrals. Five years of service clearly imposes a SROF under the regulations. Involuntary termination is explicitly mentioned in the regulations as creating a SROF. Change in control is a condition related to the business or organizational goals. But the regulations are silent on death and disability. They are not service requirements, and are not conditions directly related to the "business" or "organizational" goals of the employer. They strike me as "personal" contingencies, not business-oriented contingencies related to the purpose of the compensation. I've found guidance under 457(f) and 83 confirming death and disability are SROFs under both sections, but the 409A definition is narrower and I don't see clear authority blessing either death or disability as a SROF. A prior thread, with a few others unsure of any authority, is here: http://benefitslink.com/boards/index.php/topic/41317-short-term-deferral/ Thoughts? EDIT: After some further thought, maybe I'm looking at this particular example from the wrong angle. The SROF here is the requirement that the employee continue performing services to have any chance of payment, i.e., employee only gets paid $100,000 upon the intervening events provided he remains employed on the date the event occurs. He can't voluntarily quit in year 1, then get paid in year 3 if he happens to become disabled or there's a change in control. So in that sense the SROF remains until the end of year 5 (in which case he is paid within the short-term deferral period). Better?

If I understand correctly, and the NQDC plan benefit is simply stated as a percentage of his pay for the year, I don't think you have any problems. They can give him a pay raise one year, then a pay cut the next, but as long as they provide him the same percentage of his pay for each year in the NQDC plan, I don't see an issue.

We have a plan that improperly calculated participant entry dates for a small subset of employees. The miscalculation essentially pushed back each participant's entry date from the correct date until the next entry date six months later. For example, participants eligible on January 1, 2014, were not enrolled until July 1, 2014. The error was just recently discovered. I'd like to use the reduced 25% QNEC under Rev. Proc. 2015-28 because we're still within the "greater than three months but less than two years" period for many of the affected employees. However, the safe harbor requirements include notifying the affected participants "not later than 45 days after the date on which correct deferrals begin." Read literally, if the normal plan entry process started "correct deferrals" on, say, July 1, 2014, we would have had to notify the participant within 45 days after their plan entry date, which we obviously cannot do (and couldn't have done). Interested to hear thoughts on whether we should still aim for a 25% QNEC and give notice within 45 days of discovering/correcting the error? I get that the reduced QNEC is supposed to provide an incentive to self-correct errors early, but we're still within the eligibility window, we just didn't realize at the time of plan entry it was a "correction."

Setting aside possible relief under 2015-28, isn't the "failure to auto-enroll" the same as a "failure to implement" an elective deferral? The employee was deemed to make a deferral election on 4/1/2014, but the employer didn't implement the election. My understanding is that's the whole logic behind 2015-28: If the employer is forced to make a 50% QNEC for failing to implement auto-enrollment, the employer is less likely to use an auto-enrollment feature. If you have a typical "missed deferral opportunity" under Appendix A, section 0.5(2)(b), you still have to limit the 50% QNEC so you don't exceed 402(g): "The employee’s missed deferral amount is reduced further to the extent necessary to ensure that the missed deferral does not exceed applicable plan limits, including the annual deferral limit under § 402(g) for the calendar year in which the failure occurred." I'm not sure the intent of a missed deferral QNEC would ever be to allow the participant to be allocated 150% of the 402(g) limit in a year.

I would check EPCRS Section 10.07(9): (9) Timing of correction. The Plan Sponsor must implement the specific corrections and administrative changes set forth in the compliance statement within 150 days of the date of the compliance statement. Any request for an extension of this time period must be made prior to the expiration of the correction period in writing and must be approved by the Service. Correction of the failure to adopt timely good faith amendments, interim amendments, or amendments relating to the implementation of optional law changes, as described in section 6.05(3)(a), must be made by the date of the submission. That is, the submission should include the executed amendments that would correct this failure. See section 6.02(5)(d)(ii) of this revenue procedure for a limited extension of the 150-day correction period set forth in this paragraph for Plan Sponsors taking action to locate lost participants.

Sorry, that should be Appendix B, section 2.02(a)(ii)(B), although a similar concept is in Appendix A, section 0.5. That should get you where you need to go, but if not, I'd also take a look at Rev. Proc. 2015-28 to see if any of the new safe-harbor rules apply.

I think this section from Appendix A of EPCRS, section 0.2(a)(ii)(B) may help: The missed deferral for the portion of the plan year during which the employee was improperly excluded from being eligible to make elective deferrals is reduced to the extent that (i) the sum of the missed deferral (as determined in the preceding two sentences of this paragraph) and any elective deferrals actually made by the employee for that year would exceed (ii) the maximum elective deferrals permitted under the plan for the employee for that plan year (including the § 402(g) limit). The corrective contribution is adjusted for Earnings.

Agreed. They have to maintain the plan separately or merge the plans now that they're in the same controlled group. Not sure if this will help, but if you do a "ctrl+F" search in EPCRS for "Transferred Assets," you'll find various rules that cabin off the impact of a failure with respect to assets merged into the surviving plan after a corporate transaction.

I believe so. If the goal is to provide a plan-imposed limit only on catch-up eligible participants based on their status as catch-up eligible participants, the regs prohibit it.

See 1.414(v)-1(e)(1)(i): A plan fails to provide an effective opportunity to make catch-up contributions if it has an applicable limit (e.g., an employer-provided limit) that applies to a catch-up eligible participant and does not permit the participant to make elective deferrals in excess of that limit. An applicable employer plan does not fail to satisfy the universal availability requirement of this paragraph (e) solely because an employer-provided limit does not apply to all employees or different limits apply to different groups of employees under paragraph (b)(2)(i) of this section. However, a plan may not provide lower employer-provided limits for catch-up eligible participants.

I second (third?) the thought of treading very carefully here. In some limited cases the IRS will let this slide without resulting in a "funded" nonqualified deferred compensation plan, which results in taxation as soon as the money is funded and vested. From what I recall, the IRS has approved the use of a corporate parent guarantee where a participant's plan is with a subsidiary. The employer buying insurance, a letter of credit, bond, funding an irrevocable trust (a "secular" trust), etc. would all result in the plan becoming "funded" and losing its tax-deferred status.