Just Me

I am filing a plan for determination letter. It is an old plan that only has former employees' accounts in it. The sponsor no longer has any active employees. So who gets a Notice to Interested Parties? The rules say any "present employee" participating or working in the same location as present employees who are participating. If I check "no" to whether we provided the notice, then the instructions to the 5300 say the filing will be rejected. Based on the definitions, I don't think there are any interested parties to notify.

Employee was just rehired after a 6-year break in service. He had a couple of years of service, and was eligible to participate in the 401(k) Plan prior to the break, but did not elect to do so. Therefore, he was 100% vested in deferrals, and also 100% vested in the company matching contribution, but when he terminated, both of these were $0. So do we include the prior serivce or not under 411(a)(6)(D), which provides for excluding serivce for "nonvested participants." He was a participant, and "technically" 100% vested, but had no balance. Can we exclude the prior service or not? Can he be considered a nonvested participant if he was indeed a participant, and was at the 100% vesting level, but just didn't have any account balance because he elected not to particpate? Seems like 411 generally doesn't exclude serivce for vesting for years in which the participant elected not to contribute "salary deferral" type of contributions.

You're in a pickle on this one. You can amend to eliminate the one year delay, provided that you do this at least one year in advance, but then you'd need to add a five year delay due to the change in timing of the distribution for the existing deferred compensation amounts.

Earned while employee = paid on W-2 no matter when paid. No, just because the person is no longer an employee does not mean that you can put it on a 1099-MISC. It's still employee compensation, not non-employee compensation, since it is compensation for services provided by an employee. See other response here regarding the instructions to the form. Agree that this is not as clear as you would like in the forms, but I'm telling you how the IRS applies this. You can do whatever you like. I'm putting it on a W-2.

My two cents: No, you can't have different payment forms for voluntary vs. involuntary. The regs allow you to have different payment provisions for (1) specified age/service separation triggers, (2) separation within 2 years after a "good" CIC, and (3) all other separations. If there is not age/service/CIC component to the question, then both the involutary and voluntary SFS fall into the "all other" bucket and must have the same form and time of payment.

Document Corrections Program for 409A May Be Released in Weeks, IRS Official Says NEW YORK—A tax code Section 409A documentary corrections program could be issued as early as November, Internal Revenue Service Senior Counsel Stephen B. Tackney said Oct. 26. “I really couldn't tell you [when the program will be announced] other than it won't be in the next couple weeks … We're working as hard as we can and would like to get it out as soon as possible,” he told the American Bar Association's 24th annual National Institute on Compensation for Executives and Directors conference. The envisioned documentary corrections program would provide relief to taxpayers regarding Section 409A plan documentary failures and would function similarly to the operational failures corrections program, announced in Notice 2008-113, Tackney said. The program would instruct taxpayers how to self-correct Section 409A documentation mistakes, and associated costs for making those corrections likely will be part of the program, he said. Tackney said it was difficult to provide more precise information on when the guidance will be issued because of internal Treasury Department approval processes, but he did say taxpayers will be given adequate time to implement the program. Operational Failures Corrections Program Tackney discussed Notice 2008-113, which provides taxpayers with relief from paying additional taxes under Section 409A because of certain nonqualified deferred compensation plan operational failures. The guidance was constructed, in an attempt to ease administrative burden and promote straightforward program implementation, so entities could refer to one section of the guidance to obtain relief without having to analyze the entire notice, Tackney said. IRS aimed to achieve three chief goals in the guidance: to make corrections increasingly less costly the sooner problems are identified and fixed, to provide increasingly more flexibility in the program as the seniority of affected employees decreases, and to avoid making the cost of correcting small mistakes more expensive than the actual errors, he said. Tackney emphasized employers and employees should closely comply with the rules as explained in the notice, including all disclosure requirements. Comments received by IRS have questioned the need for the disclosures, but those disclosures are required to qualify for the relief, he said. Disclosure Rules Cited Employers need to attach information about their corrections to their returns and affected employees need to attach that same information to their own returns, Tackney said. More broadly, Tackney said the guidance has been generally well received. “Judging from the comments, or I guess the lack of comments on the operational aspects, it seems that other than people who don't like the disclosure part, it seems to be working,” he said. He also said taxpayers should not look to IRS for additional guidance on operational failures corrections. “I think we were pretty explicit that this was pretty much going to be it for operational failures,” he said.

Yes. A legally binding right exists even it if is contingent on future services.

I think the IRS would be looking at an intentional change to the plan that caused enhanced or new benefits. So the question I'd ask would be what the plan/employer would have done in this circumstance before we ever hear of 409A? Does the plan speak about participants that can't be located (probably not, or you wouldn't be asking). I'm not convinced that this rises to the level of a material "modification" to the plan. In the event the IRS said it did, then it should only affect the missing participant, not the other participants.

Anybody have any ideas? Does this mean that all actuarial valuations for 2008 must be completed and set in stone by April 30th?

So if we distribute the new annual funding notice for 2008 timely (by April 30th, since it's a calendar year plan), what do we do if we elect to change the actuarial assumptions for 2008 and re-do the 2008 annual valuation after April 30th? Do we do a revised annual funding notice? Or are we considered "late" since the final information was not included in the April 30th notice? Any ideas?

I agree with George. If you have an accelerated payment (or delayed payment) in a future year as a result of the change...you have a violation in that future year. Think of the potential abuse if it were otherwise.

I've been through umpteen IRS employment tax audits, and this issue always comes up. The test of whether someone is an employee or non-employee (a/k/a independent contractor) is done at the time the services are performed. Earn as an employee today but paid 10 years from now = report on W-2. In my experience, you will get some push back from the payroll provider, since the person "does not have a record on the system". This does not change things. Create a record. To pay on a 1099-MISC will cause a failure to pay FICA tax on the employer's part (unless it's an account balance arrangement and you already paid FICA). You don't want to go there.

If he was an employee when he DID work, there, then it's a W-2. Just because he's no longer an employee does not change this. It's W-2 compensation that was deferred from some prior year and paid in 2008.

....and then again, if you go due south from ANY city in ANY state of the United States, you'll eventually reach Canada (via Antartica and beyond). ...yes, attorney. I guess I've been busted, huh?

Quote: "Detroit is the only spot in the US where you can pass into Canada by driving south." Wait! Are there no cities in Alaska that are north of Canada??? :>)

Sal does refer to 409(l), not 409(i). His note says that the IRS appears to take the position that leased employees cannot participate in an ESOP sponsored by the recipient organization. He also references an ABA Q&A from 2004 on this point. Here is a link the the Q&A document, see Q&A-26. http://www.abanet.org/jceb/2004/qa04irs.pdf The Q&A reads as follows: 26. §409(l) - Definition of Employer Securities Approximately ten percent of an ESOP company's workforce consists of leased employees, who are on the payroll of a leasing organization, but who work on a full-time basis for the ESOP company under its discretion and control. May these employees be included as participants in the ESOP, and receive allocations of ESOP company stock? Or would that violate the "employer securities" provisions of §409(l) with respect to these employees? Propsed response: Although the statutory language can be read to exclude these employees, it is not consistent with the general purpose of Congress in permitting and encouraging ESOPs. The situation would be exacerbated if their exclusion were to cause a §410(b) coverage failure. IRS response: The IRS disagrees with the proposed answer. The answer assumes the workers are not common-law employees of the sponsor, but are leased employees. The employees must be employed by the controlled group in order to participate in the ESOP. Notice 84-11 does not list 409(l) as treating leased employees as employees of the sponsor for this purpose.

...and those that satisfy the short term deferral exception....

Since there is some amount payable even if the employee terminates for any reason (including voluntary quit), then there is no substantial risk of forfeiture from the start. This means that the short term deferral rule will not apply, since amounts are not always payable within 2½ months after the end of a tax year in which the substantial risk of forfeiture no longer applies. So it's subject to Section 409A. However, it provides for payment upon the earlier of a fixed date (August 31 each year) or separation from service. This seems to comply with Section 409A already.

I have included such language in directors' arrangements where we already have some directors that are specified employees. The regulations are just not clear on this point. Why include if you don't have any current directors that are specified employees? Well, what if one of them becomes a specified employee or the company elects a specified employee to the board in the future, and the 6 month delay turns out to apply (based on more clear IRS guidance)? Are you going to remember to add this to the plan at that time? Remember, the 6 month delay is a mandatory document requirement for 409A compliance if it applies. No harm if it never applies. Big harm if it does and you don't have the magic words in the plan.

If you are saying that you have an involuntary separation pay plan that satisfies the exception to 409A (involuntary only, no "bad" good reason provisions, 2X rules satisfied, etc.), then no, you do not need to include the six month rule. The arrangment is not subject to 409A, so there is no more need to put a six month delay provision in this arrangement than there would be to put it in any other exempt arrangement, like a qualified plan. However, in the event this plan ever fails to satisfy the 409A exception, then the language must be there. Perhaps something like: if he is a specified employee, and if this arrangement is subject to section 409A, then any payment made as a result of separation from service (other than death or qualifying disability or CIC) is subject to a six month delay. Just for protection.

What is the nature of the error? Could an argument be made that the employee was not offered eligibility in the plan until now, and his 30 days starts ticking now? If the plan says that employees are eligible based on being individually selected and notified by the company or a committee, and no action was taken, even if in error, isn't he now becomming "first eligilble." Any thoughts on the technical analysis of this approach (as opposed to anti-high paid individual comments)?

Thanks. Somehow, I knew we could do this, but wasn't sure where the guidance was (clearly not in the final regulations).

Re your second question, let's not forget the "old" constructive receipt rules. If you give all participants the option to change form and timing, with payment as soon as January 2009, for those that don't elect this (it's only 60 days away) I would be concerned about constructive receipt.

The reference to the corporate by laws makes me a little nervous. Seems like the IRS could find this ripe for abuse.

Does anyone see a problem with a nonqualified plan subject to 409A providing that if the participant's account balance is less than some fixed amount (say, $25,000) at the distribution date, then it's a lump sum, but if it's at or above that amount, it will be paid in accordance with the participant's (timely made) form and timing election, such as a 10 year installment payment? [This is not intended to fit within the discretionary de minimis rule.]