Just Me

The Final Regulations (and prior iterations thereof) say that it is not a violation of Code Section 409A to make a distribution under a NQDC in the same form and timining as provided under a linked qualified plan. It is a reasonable interpretation of this provision to conclude that no six month wait applies to specified employees if the benefits are linked. The qualified plan does not have a six month wait -- and payment in the same manner as under the linked qualified plan is not a violation of 409A.

Thanks. I'm not sure I can find an exact source of this requirement, but it does make me nervous that the IRS thinks it's uncertain enough that they need to noodle on it.

Does anybody have any opinions on whether this is required or not? What are plan sponsors doing?

We have heard that a 204(h) notice may be required to be distributed by November 16th to notify employees of the reduction in lump sum values that will occur effective 1-1-08 as a result of implementation of the new 417(e) interest and mortality rates under the PPA. Anybody heard otherwise?

Can a plan credit service with an unrelated employer for eligibility, vesting and accrual of benefits? If so, what are the potential pitfalls (like how are we going to verify the prior service, and what if all of the employees in this category are HCEs)? Thoughts are appreciated.

It's only speculation that he will leave. Well, speculate no more. Looks like Hogans has been a partner at Morgan Lewis for about three weeks now.

No, this is not a reasonable position. You are right that it wouldn't be a violation under Code Section 411(d)(6) to eliminate the 75% J&S annuity, but it would be a clear violation under Code Section 417. Nice try.

Yup. It says "equal to" and the specified percentage "is 75%". No "at least" or "not less than" kind of language. Same with the legislative history.

OK. Now I have two actuaries from different firms saying if you have a 50% J&S as the automatic payment and an optional 100% J&S, you don't need to add the 75%. Anybody else want to chime in?

Not exactly. The "new participant" election would be a very dicey approach in my mind. The employee must not have been a participant in any other account balance type nonqualified deferred compensation plan for this to be applicable, and then I'm not sure the IRS would go for it anyway. If it works, then any fixed date for payment could be specified, since it would be subject to 409A. If the payment must be made made not later than March 15, 2008, it seems like an argument could be made that there is a short term deferral (within 2½ months after the end of the year in which the substantial risk of forfeiture lapses) and not deferred compensation subject to Section 409A. However, it still is clearly a deferral of compensation into another tax year, and the "old" contructive receipt rules, which are still alive and kicking, would very likely cause the amount to be taxed this year anyway.

If he otherwise would have a right to a payment this year, but is given the option to delay it, then I think he's taking current compensation and electing to make it into 409A comp (unless it meets a short term deferral or some other exception). So I don't think subsequent deferral is the issue, but rather initial deferral. Even if it's performance-based, if it's based on 2007 company calendar year performance, it's too late to elect to defer, unless you can make some sort of "newly eligible participant" argument at this point. In addition, once he leaves, there is no longer a substantial risk of forfeiture (no continued substantial services) unless you want to go down the "subject to a condition related to the purpose of the transfer" road, which I try to avoid or tread very lightly on. The bigger issue may be whether he has constructive receipt already. We all know he's being terminated triggering a payment very soon (you just told us that), and if the company is allowing him to defer it at his request, I'd say the IRS would sure like to tax it now. "A taxpayer cannot turn his back on compensation" and all that...

Thanks. That seems to be the consensus among those I asked. If your automatic form of QSJA is a 50% QJSA then you must add a 75% QOSA starting in 2008, even if you already have a 100% QJSA as an optional form. Alternatively, make the 100% QJSA the automatic form, or even a 75% QJSA.

Our plan has a 50% QJSA, but offers an optional 100% JSA. Under the PPA, if the QJSA is less than 75%, then a 75% "qualified optional survivor annuity" (QOSA) must be offered. Some of the write ups we're seeing say at least 75%, but Code Section 417(g) seems to say it must be equal to 75%. Does the 100% JSA that we offer suffice, or do we need to add a 75% JSA starting in 2008 to comply with the PPA?

We have been approached by a consultant regarding our ESOP (we are an S-Corp). We currently limit distributions to cash, but the consultant says we can amend the plan to distribute stock with a "call option" so that the company can decide when it can come up with the cash to buy the stock from the participant. I assume the stock would also require a "put" option. Has anybody heard of this? Issues?

I noticed this issue when the final regulations were published. "Annual rate of pay" does not have any provision for looking at the current year pay or other alternatives when the person has no prior year compensation with the employer. My conclusion was that you couldn't use the exception for newly-hired individuals (and perhaps the frequency of involuntarily terminating someone in the same year you hired them would not be very great). Since cash flow is a problem for your situation, so a short-term deferral lump sum wouldn't work, then it seems like you'll need to be sure the payments satisfy Section 409A form and timing requirements. Not fitting within the exceptions doesn't mean you can't do what you want, it just reduces your flexibility.

Try looking into the IPEBLA. http://www.ipebla.org/

In order for the pre-2005 salary deferrals to be exempt from 409A, they would need to have vested prior to January 1, 2005, i.e., no longer be subject to a substantial risk of forfeiture. It is rare that a deferral subject to Section 457(f) would be vested because under the 457(f) tax structure, once there is no longer a substantial risk of forfeiture, it's includible in gross income of the employee. Although the definitions of substantial risk of forfeiture are different between 457(f) and 409A, I'd be mighty surprised if these amounts were eligible for grandfathering.

I haven't seen all the numbers, but it appears that the original poster determined that as a corporation, the allocations were incorrect. VCP would be the way to fix this since it's likely not insignificant. You are right about a P.C. What I have run into is doctors thinking they are part of a regular (not a P.C.) corporation, in violation of the state's "corporate practice of medicine" prohibitions. It usually turns out that either the doctor didn't know it was a P.C., or it wasn't a corporation after all. Just something to be extra sure about before running contribution calculations.

Sounds like a VCP would be in order to correct this tangled web. Not that it helps you now, or maybe at all, but in some states, like mine, corporations are not allowed to practice medicine. So when a doctor says he or she is a corporation, that should always be questioned because it cannot be the case. May not be the case in your state, though.

Funds paid from NQDC account within the preference period preceding a bankruptcy of the employer are subject to a claim by creditors and may be required by law or court order to be paid back to the estate. See Enron case for example.

It depends. The question is whether ERISA applies. If the employer is governmental, no. It it's a church, it could go either way depending on the church's election with respect to ERISA. If not exempt from ERISA, then the match makes it an ERISA-covered plan and such rules apply.

Does anyone have any info on possible ways to avoid sanctions arising out of the IRS crackdown on 412(i) plans? For example, we want to argue that the plan sponsor operated the plan as it was approved in the prototype opinion letter, and thus sanctions should be N/A. I have heard that some sponsors have been successful in getting sanctions waived based on that type of argument, but we cannot find anything helpful. Any leads, articles, etc. would be appreciated.

If the agreement provides for vesting upon actual retirement following attainment of a specified age, and nothing else, then the substantial risk of forfeiture lapses under Section 83 at the specified age. If there is something more, such as an approval process to designate the termination as a retirement, then perhaps you have a tenuous argument that there is a substantial risk of forfeiture, but I would be concerned about whether, in practice, a denial is ever given, and more importantly, I'd be very wary if the employee had substantial influence in the organization such as the CEO. Would the company really say that a CEO terminating employment at age 67, for example, was not "retiring"? If there is an ongoing non-compete, that might work as long as the shares remain nontransferrable during the noncompete period and the company can demonstrate that actual claw-backs occur in practice upon breach of the agreement (i.e., is the provision more than illusory).

As a general rule, we don't recommend providing for a lapse of the substantial risk of forfeiture upon reaching retirement age for this very reason, just death, disabilty, change of control, and either time-based or performance based vesting. I wouldn't be surprised if not all agreements have been drafted taking this into consideration, however. And I am sure the IRS looks at this in audit situations.

I don't think there is a substantial risk of forfeiture for 409A purposes, because it's not conditioned on the performance of substantial future services or a the occurance of a condition related to the purpose of the transfer. In addition, since it is not BOTH non-transferrable and subject to a substantial risk of forfeiture, it would be currently taxable under Section 83. Looks like all you have is a current (taxable) transfer of stock that has restrictions on transferrability. Not such a good deal for the recipient.