Luke Bailey

Dennis G., I think what the Code anticipates is that the employer buy's back the stock from the employee or the IRA the employee rolls it to, after distribution. Then obviously there is no problem with deduction or 415 limits. The employer can then contribute stock to the plan, within the 404 and 415 limits.

EBECatty, I found this all very confusing as well when I read the 457(f) proposed regs way back when. I am reasonably sure that in your example, yes, the individual would be taxed in 2019, so there is no deferral at all. No NQDCP subject to 409A, no short-term deferral. Just income. And of course, the earnings on the unpaid amount (e.g., the whole thing in your example, or the after-tax amount if they paid the individual an amount equal to his/her taxes) would become NQDCP under the rule that doesn't include vested earnings until payment, so you'd want to comply with 409A for the earnings, which in your example you would since you have the fixed 2025 payment year.

cheersmate, I had not reread your question, and I see from C.B. Zeller's input that this goes back to 2017. You need to talk to your own adviser, but quite arguably, since the individuals in question are cash basis taxpayers and the employer DID NOT pay them, you don't need to change their W-2's (unless you want to show the amount as not contributed to the K plan, which won't affect their gross income, and is merely informational) and they do not need to file amended returns. Query, in applying their correct deferral percentage for 2017, were the unpaid and uncontributed amounts included as 2017 "compensation?"

So cheersmate, if I understand you correctly, the employer's withholding them was the mistake, not its failure to contribute them. Contributing them would have been contrary to the plan's terms. If my understanding as expressed in preceding paragraph is correct, then you have an employment law issue, not an ERISA issue. Presumably if the amounts are reasonably small your state employment law would be practical about this, and a refund, perhaps with some interest, would be in order. You might want to talk to the employees and, if your plan allows, permit them to make a special 2019 election regarding these funds, if they would rather have them contributed to the plan. There are W-2 reporting issues here for 2018 or 2019, but I can't really provide you with individualized advice for that.

Dennis G, you mean that the value of the shares of the single departing participant is so great that each other participant's share of the amount contributed to purchase those shares exceeds each of those other participants' 415 limit?

Actually, I can't tell from the question whether these wee authorized or not. The plan apparently permits special elections for irregular pay, so the question becomes whether these folks made the election for these amounts (in which case the contributions should be made, but are late, so will need to be grossed up for interest/earnings) or they made no election and the plan should not have applied their regular deferral percentages to the irregular pay, in which case the money should probably be refunded under local employment law rules, whatever those may be.

What Life insurance agents sometimes referred to as a “section 162 bonus plan” has some of the characteristics of nonqualified deferred comp, but is not unfunded and therefore doesn’t have the creditor risk. It’s not a panacea, but you might look into it. You should be able to find some information about these by just googling the term “section 162 bonus plan,“ with and perhaps without the name of your favorite life insurance company. The ones active in the market use majestic animals, implying strength and stability, in their advertising. There are no magic tax benefits for Section 162 bonus plans, but, depending on the financial goals and expected turnover of your HCE’s, they might be worth looking into.

When you terminate a PBGC-covered plan in a standard termination, the PBGC will let a 50% or greater owner waive his or her benefits if the plan isn’t fully funded, so that the rank-and-file can be paid 100% of their benefits . There’s actually a “majority owner waiver form“ that you use. That will probably also work for a surviving spouse, if she is a 50% or greater owner of the business following the death of the participant . My recollection is that where the participant is still alive as the majority owner and you use the majority owner waiver, the spouse must consent, so that would imply that it would work for a surviving spouse as well. The IRS (probably correctly) takes the position that the minimum funding excise tax is statutory, and therefore it has no authority to waive it. If you file the delinquent 5500s under DFVCP, with the schedule B’s showing that minimum funding has not been met for several years, the IRS will likely assess the excise tax for at least the last three years. It could be a lot of money. Terminating the plan on an underfunded basis using a majority owner waiver will not erase the minimum funding violations for purposes of the excise tax. so make sure you have calculated the minimum funding excise tax exposure on a pro forma basis for the client before you recommend that they file the back 5500s. Of course, you’re between a rock and a hard place because there are very large potential penalties also for for failure to file the 5500s. All I’m saying is that you should make sure that your client understands the risk. As with any tax, especially a punitive excise tax like the minimum funding deficiency excise tax, if the IRS assesses it, you may be able to compromise the payment based on inability to pay, depending on the facts, of course. I don’t think you mentioned this in your question, but if the plan sponsor was a corporation, the minimum funding excise tax liability will be on that corporation, and at this point it may not have a lot of assets. If the business was the sole proprietorship, then you’re in a weaker position regarding any assessed liability.

It would take me a while to find it, but I seem to recall there is clear IRS guidance, e.g. a 1990 Rev. Rul., that such a plan must be terminated, in part because there is no longer an employer to amend it for law changes. I think that same guidance or some other guidance authorizes the sole proprietor's widow, if the sole proprietor passes away before the plan can be terminated.

RatherBeGolfing is usually right, and he may be right here, but I would point out that under the "check the box" regulations a single member LLC that does not elect to be taxed as a corporation is "disregarded" for almost all federal income tax purposes.

Right, kmhaab. For the STD rule to apply, the participant cannot have a choice about when to land the income. For example, if the plan you are dealing with said that the amount would be paid when it vests, it would appear to be includable in 2019. We are assuming above that under the arrangement as written the payment could be made by the obligor no later than 3/15/2020, but is not required to be paid in 2019, i.e., the STD standard. Look at Prop. Reg. Section 1.457-12(d)(2). It's on page 19 of the Federal Register .pdf, which you can easily Google. Again, these are proposed regs. They could be a lot clearer, as I stated earlier, and the principle is not illustrated by an example, but I think you will find that if there is no "deferral of compensation" for purposes of Section 457(f), then 61 and 451 are applicable, not 457(f). But (a) again, these are only proposed regs, and (b) maybe you will interpret the point differently. For purposes of section 457(f) and this section, a deferral of compensation does not occur under a plan with respect to any payment for which a deferral of compensation does not occur under section 409A pursuant to § 1.409A–1(b)(4) (short-term deferrals), ...

I see that austin3515 thinks FICA in 2019. He may be right. Not clear what IRS intended or that it thought about this, but again under the proposed 457(f) regs, if there is a 409A short-term deferral, there would be no "deferral of compensation" for 457(f) either. So if the 457(f) regs became final without change on that point, you would have to take the position that something that was not a "deferral of compensation" for purposes of 457(f) was for purposes of 3121(v) and its regs, which use exactly the same phrase, i.e., "deferral of compensation." Seems unlikely to me that IRS would do that. Interesting question though. Since FICA in 2020 would be an inference from proposed regs, and otherwise FICA would be imposed in 2019, there is probably support for inclusion in either year.

Cardscrazy, I don't know of anything that specifically covers this, but I will vote for/guess that FICA would also be delayed in this instance to 2020. Footnote 11 of the proposed regs says the proposed regs don't apply for 3121(v) FICA tax on deferred comp rules, but if there is no "deferral of compensation" under 457(f), I think you would just be under the general wage payment time rules for FICA, not the 3121(v) rules. Not completely clear, and again, the regs are only proposed, so follow your own counsel.

I agree with jpod. think the way the IRS would look at this would probably be as a straight-up payroll agent situation which would require adherence to those rules, including filing Form 2678. I also agree with him that a legitimized payroll agent relationship would not fix any employee benefit issues, since the payroll agent has no effect on the exclusive benefit rule.

I agree with EBECatty as to what the proposed regs seem to say. It's easy to miss because there are other statements in the proposed regs that just repeat the rule of the statute that it's includible in income when vests, but other verbiage seems to say that if the arrangement meets the 409A definition of "short-term deferral," there is no "deferral of compensation" for purposes of 457(f), so the inclusion would be under Sections 61 and 451 (i.e., when paid or constructively received), not 457(f) (when vested) . Unfortunately, I don't think any of the examples actually nail this important and surprising point down. With any luck, IRS will illustrate with a clear example in the final regs. Even more unfortunately, I don't think the proposed regs have a provision clearly giving you reliance before they come final, and the rule in question seems contrary to the statute. On the other hand, the preamble seems to give you reliance, or at least contains the following two sentences, which to me seem somewhat contradictory: "No implication is intended regarding application of the law before these proposed regulations become applicable. Taxpayers may rely on these proposed regulations until the applicability date."

Belgarath, does the plan have a provision describing how one "designates" a beneficiary, e.g. by form, and whether spousal consent is required? Does the plan have a provision for who is default beneficiary if participant does not designate? If the answer to either of those questions is "no," just seems like a defectively written plan and I would tread very cautiously.

LANDO, the criteria IRS seems to use are (a) what did the sponsor intend, and (b) what did it consistently communicate to participants. There may be other factors as well. I am only inferring this from prior cases, both mine and ones other practitioners have discussed, since the standards are not published or articulated by IRS. In the case you described, it seems the communications with participants may have been mixed. A careful review of all the documents and other facts would be required to determine the merits. You can convert an anonymous to a regular VCP. Note that if the employer is committed to making the required contributions if it comes to that, then there may or may not be a tactical advantage to going in anonymously first. In any event, a careful calculation of the sponsor's exposure worst case should be done.

JRN, no, of course. Thanks for the clarification. This would not qualify for SCP. Would need to be a VCP submission, and depending on facts and possibly other factors, IRS might or might not grant the correction requested. Might be a good candidate for anonymous submission, although a careful consideration of the pros and cons must always be done in deciding whether a submission should be anonymous or disclosed.

ERISA-Bubs, I started out years ago (actually, decades) as an income tax lawyer, but now do employee benefits/exec comp. You are right that 409A and Section 83 are irrelevant. You need to talk to an tax lawyer. This sounds like an equity for debt exchange. You might Google that phrase, but you really need to talk to a tax lawyer.

Will third ESOP Guy and Bri. Had exactly this case few years ago. Involved several million dollars. IRS ruled favorably on VCP except for a couple of years at the beginning of the period where our backup on what was communicated to employees was not good. It is an operational failure, but may be correctable by plan amendment. You really have to read between the lines of Rev. Proc. 2019-19 and prior EPCRS Rev. Procs. to understand this is possible. Of course, makes you good only for IRS. In theory, DOL or employees could sue you under ERISA, but I have not seen that. Also, see 7th Cir. Verizon case for argument that you can retroactively rform plan document under ERISA, although there is also a 4th Circuit case contra.

Pammie57, I'll be happy to be corrected on this, but if they actually terminated the plan in 2017 (which is a mixed issue of law and fact, but let's assume they did it since you say so in your question), I don't think they can "fix" it in the sense of reporting the payments to the employees on a 1099-R rather than a W-2 unless they make a VCP submission. See Section 4.07 of Rev. Proc. 2019-19. It would be an easy peazy VCP, if that's the only problem and they have the cash for both the contributions and earnings.

Belgarath, does the plan permit such a change in beneficiary, and is the plan requiring that the spouse consent to this beneficiary designation? If not, isn't it likely that, as Peter suggests, under state law and the plan document the surviving spouse would be owed the money? In other words, isn't it likely that the spouse has rights under the plan as well as the participant? Moreover, even if the plan permits the surviving spouse to consent to the revocable trust's becoming the beneficiary, unless the plan makes it really clear that the participant can designate someone other than the spouse as his or her beneficiary without the spouse's consent (which seems both unlikely in general and controverted by the plan language that you quote), the surviving spouse might be taxable on the benefit as it is paid under the federal income tax "fruit of the tree" doctrine (see Lucas v. Earl), even though it is paid to the trust. There is guidance to the effect that a disclaimer following the participant's death that meets the estate and gift tax requirements of Section 2518 of the Code can overcome the assignment of income problem, but based on what you have described the surviving spouse's consent to the designation of the trust as beneficiary would fail the requirements for a qualified disclaimer on several grounds.

I think 414(c)-5 does cover this situation, Purplemandinga. A for-profit organization that controls at least 80% of the nonprofit's board is an "any other organization" for purposes of Treas. reg. 1.414(c)-5(b).

If a 401(k) plan fails ADP, distributes the excess contributions as required to correct the failure, and in the process HCEs forfeit matches attributable to the distributed excess contributions, as they must, can the employer turn around and provide taxable (W-2 compensation) bonuses to the HCEs with the match forfeitures, for example exactly in the amounts of the individual match forfeitures, without violating the anticonditioning rule of Treas. reg. sec. 1.401(k)-1(e)(6)? Arguably this is OK, because the bonuses are not conditioned on the employee's making or not making the elective deferrals, but rather are conditioned only on some of the elective deferrals failing ADP, since in order for the bonuses to be paid, in the amounts they are paid, both (a) the HCE must have made the elective deferral, and (b) a portion of deferral must be distributed to correct an ADP failure. On the other hand, the employee would not receive the bonus if he or she had not made the deferral to begin with, albeit that the employee did not know at the time he or she made the deferral whether a portion would be returned to him or her as excess and result in a cash bonus rather than a 401(k) match. The reg says that the conditioning can't be "direct or indirect" (emphasis supplied), so maybe what I'm describing is "indirect" conditioning. On the other hand, what is being proposed here is very similar to what you can do with matching in a nonqualified spillover plan matched to your 401(k) plan, although the PLRs blessing those seem to be based on part on the language in 1.401(k)-1(e)(6)(iii) specifically dealing with nonqualified plans, so maybe they are distinguishable on that basis, and of course they are only PLRs anyway.

Santa Gold, I cannot comment on your individual situation, since I don't have the documents or all the facts, but Treas. reg. 1.72(p)-1, Q&A-19(b) indicates that if a deemed distributed loan (first loan) that has not yet been "really" distributed as a loan offset, including the first loan's accrued post-default "phantom" interest" up through the date of the new loan disbursement (second loan), leaves enough room, after being subtracted from the "lesser of $50,000 or 50% of account balance" limit of 72(p)(2)(A), for the second loan, then the second loan can be made, if either (a) the second loan is subject to payroll withholding repayment, or (b) there is otherwise adequate security (e.g., the employee pledges something else of value, other than his or her plan interest, to secure the loan). If these conditions are met and, e.g., the payroll withholding repayment option is used, then the loan is deemed distributed if the payroll withholding election is revoked. You might want to review carefully this provision in the regs.