Louis Richey

Agree no 409A issues generally, but could be ERISA issues despite being top hat. See Plotnick v CSC, 458 F.3d (4th Cir Ct App. Nov. 2017) for a very recent case on this very issue- right of sponsor to change the crediting rate. High level answer from the case- proper process and nondiscrimination (fairness) in the change between participants. This case held the participants did not make their case so the opinion of the App. Ct. is a good one for practical guidance on elements to avoid problems.

My bad. I do agree with XTitan that a CIC deferral election under 409A(a)(2)(A)(v) as amplified by 1.409A-3(i)(5) likely covers this situation and not the voluntary termination regs I cited, at least so long as there is not a second plan of same 409A type being terminated in connection with the CIC, and assuming the CIC meets the requirements of Subsection 1.409A-3(i)(5)(v) definition. There are some majority shareholder landmines in (i)(5)(ii) (A)-(B) to note, but they did not look obviously applicable. I also agree if elections to defer were made for 2018 they need to be executed in payroll and bookkeeping and a new account for post CIC deferrals makes sense (a class year plan should do this anyway). However, likewise, if elections were not made (or there is no evergreen provision) so no elections were made for 2018, the late date when they can be made has likely now passed, except for perhaps election to defer 409A performance based compensation if that applies. That PBC election does not need to be made (become irrevocable) until 6 months prior to the end of the performance period. Thanks XTitan for the quick correction.

I am not so sure. It is buried in the 409A permissible payment regs, but I believe your situation is covered by 1.409A-3(j)(4)(ix)(C). Under that subsection a valid 409A CIC distribution requires under (C)(2) the plan sponsor "terminates and liquidates all agreements" including those that would be "aggregate with any terminated and liquidated agreements'" In addition, under (c)(5) the plan sponsor may not even adopt a new plan "that would be aggregated" for a period of "three years" following the termination and liquidation of the plan whence came the distribution. The IRS did not want to see CIC distribution abused so they have narrowed its use severely.

Perhaps this really involves the ability of a sponsor to accelerate vesting. This acceleration can take place even if it is right before a distribution which means that a participant can receive something or more than he/she would have received otherwise. There would be and be no participant election to such acceleration under 409A. The same is true of the right of a sponsor to accelerate distribution of a "small amount" (an amount less than the 402(g)(1)(B) amount- $18,000 this year). These two things sometimes get confused. But in either case, the participant cannot make the decision, and the sponsor should probably treat all participants equitably when doing so to avoid issues later (like accelerate vesting for some executive - CEO- and not others). Otherwise, like XTitan says, what does the doc say???

I have always taken a very conservative position on doing these types of designs because of the potential ERISA issues with too close a tie to a specific single COLI (or any specific asset for that matter). I recommend consideration of a generic employer account balance plan design based upon the value of a "package of potential assets held in connection with the plan in the company's general asset reserve" on the date of distribution. The package listed in the doc may include certificates of deposit, stocks, bonds, COLI contracts, annuities, etc. with the value for COLI contracts usually being the cash value the day before death, with the net policy death benefit (or some portion of it) going out under a separate endorsement split dollar arrangement. In any event you will need to decide how a death situation will be handled while still under the plan. Of course, all the sponsor may ever have is one COLI behind the plan but in this framework the COLI is not directly identified and only plan "book-keeping" account values will be reported the participant.. Additionally, this approach leaves the company free to utilize other company acquired and owned assets deemed desirable to place behind the plan to become part of the participant's phantom balance due under the plan. You can find more discussion on this in BNA Portfolio 386 4th "Insurance as Compensation".

Having had an opportunity to explore this issue in some depth, I agree with XTitan's summary answer. Only if the sponsor has selected the alternative of making fixed date elections upon Separation from Service to satisfy the "specified employee rule" do I think the Regulations would require a 5.5 year setback. Otherwise I believe you can reasonably argue the 5 year set back satisfies the 6-month delay requirement, especially when you consider the objective for the delay in the first place.

This is a really confusing area after 409A. Unsecured and unfunded deferred compensation plans historically avoided constructive receipt and current income taxation if they are subject to a "substantial limitation or restriction" under Reg. Sec. 1-451-2(a). A promise-to-pay plan subject to the claims of the employer's general creditors has such a limitation. In my experience, this limitation is often called a substantial risk of forfeiture by commentators and even some courts. The question here is the plan also subject to 409A, which is additive law furthering defining the constructive receipt doctrine? To be a 409A-covered plan, it needs only to be a "nonqualified deferred compensation plan" that involves a "deferral of compensation" which in plain English is a binding promise in one year to pay compensation in a future year. This looks to be the case here.. The only way to avoid the application of 409A is if the plan is if is an exempted plan (like 457(b) plan) or can satisfy the 409A "Short-Term Deferral Exception." The plan requires a 409A substantial risk of forfeiture to claim this STD exception. 409A substantial risks are those we all tend to call "real" risks of forfeiture like those to be found in Section 83 governing funded plans, and does not include the risk of loss to general creditors as an adequate risk. Most plans do not place real of risks of forfeiture on vested compensation (salary and bonus amounts voluntarily deferred), and one is not present in the offered plan design. And 409A can cover a plan for a single person. Hence, looks like this plan is subject to 409A, which means that it also must satisfy the requirements of Section 409A which are both: 1) documentation compliance and 2) operational compliance. FYI- with the addition in the June of proposed regs creating the separate definition of substantial risk of forfeiture under 457(f) governing tax exempt ineligible plans, there are now 7 different definitions of substantial risk of forfeiture in the Code for different purposes.