EBECatty

I agree with a few of the prior posts: Whatever they call the "reversal," it's additional capital invested in the company, not a reversal of their paychecks retroactively. Or at least that will be the IRS's position.

I think so too, but it's not my opinion that matters.

My understanding is there's no "official" cutoff date and that you should correct for as far back as you have records. On a related note, has anyone relied on the provisions sometimes used in salary reduction agreements or other plan docs that say basically "it's your job to confirm your deductions from your paycheck and if we use an incorrect one or fail to implement, you'll be deemed to have elected the amount we use (or $0 if we fail to implement) unless you notify us..." I've seen at least one case where the plan sponsor failed to implement an election that resulted in $25,000+ of missed deferrals over the course of two plan years because the participant never reviewed his pay stubs or account statements.

Not sure if this helps, or is simply restating the confusing part, but below is the IRS regulation governing transfers of assets and liabilities (1.414(l)-1(o)). (That's a lower case "L" and a lower case "O" in the cite.) However's easiest to think of the transfer, the regulations will view it as a spin-off of a portion of the transferor plan, then a merger of that portion into the transferee plan. (o) Transfers of assets or liabilities. Any transfer of assets or liabilities will for purposes of section 414 (l) be considered as a combination of separate mergers and spinoffs using the rules of paragraphs (d), (e) through (j), (l), (m), or (n) of this section, whichever is appropriate. Thus, for example, if in accordance with the transfer of one or more employees, a block of assets and liabilities are transferred from Plan A to Plan B, each of which is a defined benefit plan, the transaction will be considered as a spinoff from Plan A and a merger of one of the spinoff plans with Plan B. The spinoff and merger described in the previous sentence would be subject to the requirements of paragraphs (n) and (e) through (j) of this section respectively.

Why isn't a separation from service between age 65 and 70 still a separation from service? 1.409A-3(a)(1) says a permissible payment event is "(1) The service provider’s separation from service (as defined in §1.409A-1(h) and in accordance with paragraph (i)(2) of this section)" 1.409A-1(h) says a separation from service is when the employee retires, dies, or otherwise has a termination of employment. Paragraph (i)(2) is the six-month delay for specified employees. I'm not aware of any other rule that says plans must pay out ONLY on ANY separation from service. For example, you can pay out only on involuntary separation from service, good reason separation, elect different forms of payment for separation occurring before/after a specified age, etc.

It doesn't seem clear to me that the employee is "accruing" any new benefits after 2004. If I recall, earnings on grandfathered amounts (even if earned after 2004) remain exempt, no? Agree it's unclear what would happen (without more facts) if the employee continued working past age 70, but is a window really a problem under 409A if you had an otherwise-permissible separation from service? You can always pay on a separation from service, even if the employee chooses when to separate.

A few thoughts: 1. I think retirement is fine for a separation from service, as long as the employee meets 409A's definition for a separation from service. No problem with paying an employee when they "elect" to retire as long as they have a valid separation from service. 2. If this plan is 24 years old, and the employee was fully vested in the benefit before 2004/2005, wouldn't the plan be exempt from 409A altogether? I'm assuming it hasn't been modified since 2004 if it was just re-discovered.

Curious whether there was any resolution of this issue?

Would appreciate any input on the following: Employer maintains an NQDC plan that allows elective deferrals and other employer contributions. (Every participant in the NQDC plan is an HCE.) The NQDC plan allow employees to defer up to 100% of their salary remaining after all payroll deductions. Employer's 401(k) plan says any 401(k) participant who defers into the NQDC plan for the plan year may only defer a maximum of 4% of compensation into the 401(k) plan. Read literally, this only violates the contingent benefit rule if the NQDC plan deferrals are restricted based on the employee's 401(k) deferrals (or lack of deferrals). Here, the NQDC plan is silent on the issue, but the employee's 401(k) deferrals are limited. Permissible? Or "indirect" condition on NQDC participation? We've received a favorable DL with the plan language, but with reliance running out fairly soon, I'm interested in hearing input.

I've usually seen SERP payments held in trust run back through the employer's payroll to make sure withholding, W-2 reporting, etc. is all coordinated.

Although I've never encountered this exact situation, the Section 83 regulations address a few of these issues. 1.83(a)-1(a)(1) gives consistent tax treatment to the employee regardless of whether the transferor (here, the sub) is the recipient of the employee's services. Section 1.83-6 governs the deduction, with (a)(1) saying the service recipient gets the deduction. There's no mention of services performed for another. Section 1.83-6(d) lays out rules for the treatment in the opposite context, i.e., parent gives sub employee parent stock for services rendered to sub, but I don't see the treatment anticipated here. Under a literal reading of the regs, it sounds like the parent would still get the deduction, but I'm not positive that's the right outcome.

There's a lot to unpack here. Is a plan already in place under which the executive has a balance? The terms of the plan will matter as well. Does he have a 409A-covered NQDC plan with the parent? If so, not positive, but you may need to worry about change in form of payment rules if the current plan provides cash payments. All NQDC "plan assets" have to remain assets of the employer until paid, so he can't really "buy" the units with his NQDC plan balance; he could only hypothetically invest in them. If you resolve everything else and he's ultimately given property to satisfy his NQDC payments, I would think section 83 would apply.

Agree with QDROphile. If the plan only provides a CIC payment trigger on a sale of assets, the transfer of stock among existing shareholders will not trigger a CIC. The 409A rules provide permissible CIC definitions, not mandatory ones. If the plan hasn't opted to use the change in stock ownership rules, they won't apply.

I see a few prior threads answering some portion of these questions, but wanted to solicit thoughts on an issue I've had come up several times. A small, privately held company wants to grant a key employee a portion of the proceeds of any major transaction. No equity will be involved; it will simply require the company to make a cash payment to the employee of, say, 10% of the total transaction value. They also want the payout to follow the same schedule of payments made to the company/shareholders for the purchase. So if the company is paid $1M at closing, then is paid contingent payments depending on earnings over the next 3 years, the key employee will get 10% of the first $1M and 10% of each contingent payment. Most likely, any transaction will be a 409A-compliant change in control. In that case, 1.409A-3(i)(5)(iv)(A) should apply and allow payments for up to five years based on the same terms as the company or shareholders receive payments from the buyer. If we don't use a 409A-compliant CIC definition, we can use the short-term deferral exception for any payments made before March 15 of the year following closing, e.g., entire amount paid within 30 days of closing. No further payments based on company's contingent payments. No problem there as we don't need a 409A CIC to use the short-term deferral exception. I see a noncompliant CIC definition being useful here. Say the shareholders sell 60% of the stock to a buyer, creating a change in control, in 2015. Then in 2016 they sell the remaining 40% of their stock to the same buyer. In that case, the employee is only entitled to payment on the first 60% if we're using a 409A-compliant definition because the acquisition of additional control is not considered a change in control. Now combine the two. If we have a noncompliant CIC definition, the first payment within 30 days of closing will be fine, but I'm concerned with the three additional contingent payments. Assume the hurdles for contingent payments are "substantially" at risk, i.e., there's a substantial risk the company may not meet the targets. Can we use the short-term deferral for the three years' worth of contingent payments to the employee? In other words, because there remains a substantial risk the company will not receive the contingent payments, there's a substantial risk the key employee won't receive anything. Here's my concern: The preamble to the final regs says "one commentator suggested that any right to a payment be treated as subject to a substantial risk of forfeiture until the amount of the payment is readily determinable, at least where the payment could be zero. The Treasury Department and the IRS do not believe that this standard is appropriate." I think there's no question the key employee here would have a legally binding right to the contingent payments if the company receives them. The preamble seems to say that the contingent payments are not subject to a risk of forfeiture simply because the amount is not determinable (and may be zero). Am I reading this too broadly? This seems to leave two possibilities: (1) use only a 409A-compliant CIC definition and allow contingent payments to the employee under the five-year rule; or (2) use a noncompliant CIC definition and require all payments within the short-term deferral period. Any other suggestions on how to combine the two permissibly?

We've had some luck carrying over certain information from a resolution to prove the status of the plan document. In a recent DL process, we had a signed but undated GUST adoption agreement the IRS challenged as untimely. We used the signed/dated resolution approving the GUST restatement as proof of its timely adoption, even though the date wasn't on the adoption agreement itself. Not sure about carrying over a signature and date, but it's definitely worth a shot.

It does. You would think, as a practical matter, the IRS would waive maybe all but one year's worth (or hopefully more). Or at the absolute most the entire plan balance. I can't imagine them enforcing an excise tax of 300% of the plan balance....

From the payee's side, a 401(k) participant's non-spouse beneficiary failed to take a full RMD after five years. The plan document required a five-year full distribution. Year 5 ended several years back. No RMDs have been taken, and the entire original balance is still in the plan. Not concerned about the plan sponsor's side, except to the extent their submission through VCP would help avoid payee's excise taxes. I'm reading 54.4974-2, Q&A 5 to say that the RMD for each year after Year 5 represents a separate RMD failure for each subsequent year based on the entire remaining balance in each subsequent year. Say Year 5 end-of-year balance is $100,000. Failure to remove everything results in a $50,000 excise tax in Year 5. Year 6 end-of-year balance is $110,000. Failure to remove everything during Year 6 (the required RMD for Year 6 per Q&A 5 is the entire remaining balance) results in an additional $55,000 excise tax for Year 6. Year 7 end-of year balance is $120,000. Failure to remove everything results in an additional $60,000 excise tax for Year 7. And so on. After three years, the excise tax would be greater than the original plan balance, I don't see any relief except potentially the IRS's consideration of waiving the excise tax for "reasonable error." Would someone point out what I'm missing?

From the payee's side, a 401(k) participant's non-spouse beneficiary failed to take a full RMD after five years. The plan document required a five-year full distribution. Year 5 ended several years back. No RMDs have been taken, and the entire original balance is still in the plan. Not concerned about the plan sponsor's side, except to the extent their submission through VCP would help avoid payee's excise taxes. I'm reading 54.4974-2, Q&A 5 to say that the RMD for each year after Year 5 represents a separate RMD failure for each subsequent year based on the entire remaining balance in each subsequent year. Say Year 5 end-of-year balance is $100,000. Failure to remove everything results in a $50,000 excise tax in Year 5. Year 6 end-of-year balance is $110,000. Failure to remove everything during Year 6 (the required RMD for Year 6 per Q&A 5 is the entire remaining balance) results in an additional $55,000 excise tax for Year 6. Year 7 end-of year balance is $120,000. Failure to remove everything results in an additional $60,000 excise tax for Year 7. And so on. After three years, the excise tax would be greater than the original plan balance, I don't see any relief except potentially the IRS's consideration of waiving the excise tax for "reasonable error." Would someone point out what I'm missing?

Not sure if you've resolved this yet, but I think jpod is right: There's a "legally binding right" for 409A purposes upon granting the phantom interest, but it remains at a substantial risk of forfeiture until carry is paid to investors (which may never occur, or may be zero). As long as the phantom carry is paid to employees by March 15 of the year following the carry payment to investors, it's a short-term deferral.