Just Me

I have just heard that the IRS is saying the preamble is incorrect and the time period for termination under the good reason provisions is two years. Hopefully, we'll get some formal confirmation of this soon.

I agree. The employer cannot withhold the 20% excise tax because it has no authority to do so. My concern was primarily with the concept of threatening the employee with a 20% withholding taken from his wages (if he didn't pay over the amount that should have been deferred) where the employer has no right or authority to do so. I would hate to think that anyone is advising an employer to do such a thing.

"the 20% excise tax will be taken out of their paychecks" Good luck in taking the 20% excise tax out of their paychecks. There is no requirement or authority under Section 409A for the employer to withhold this amount, and without a written agreement by the employee, it would likely violate your state's payroll laws.

All of the summaries being published and used in connection with the recent webcasts and teleconferences are saying one year. My guess is that the actual regulations are in error and a technical correction will be forthcoming.

The IRS's position is that if a NQSO has an exercise price that, at all times, is at least as great as the fair market value of the underlying stock on the grant date, and there are no additional deferral features, is is exempt from Section 409A (not just merely compliant with Section 409A.) Here is an excerpt from the (soon to be finalized) proposed regulations on this point: "The legislative history states that section 409A does not cover grants of stock options where the exercise price can never be less than the fair market value of the underlying stock at the date of grant (a non-discounted option). See H.R. Conf. Rept. No. 108-755, at 735 (2004). Thus an option with an exercise price that is or may be below the fair market value of the underlying stock at the date of grant (a discounted option) is subject to the requirements of section 409A. Consistent with the legislative history and with Notice 2005-1, Q&A-4, these regulations provide that a non-discounted stock option, that has no other feature for the deferral of compensation, generally is not covered by section 409A. However, a stock option granted with an exercise price below the fair market value of the underlying shares of stock on the date of grant generally would be subject to section 409A except to the extent the terms of the option only permit exercise of the option during the short-term deferral period." Section 409A and most of the related guidance was developed before stock option backdating hit the fan.

We had exactly the same situation. IRS says this is correctable under VCP, with the only correction being retroactive adoption of the plan by the employers who were participating but didn't formally adopt (assuming, of course, that the intent is to have this employer participating). No self correction appears to be available.

...which, if it is smart, will advise you seek your own tax counsel's advice.

I have heard the IRS say that they will allow an SCP to be done even while under exam. I never had it come up, so I don't know how easily they allow it, though.

1. 20% penalty tax. 2. extra tax based on interest plus 1% from date deferred. 3. actual interest. 4. bundled with all other similar (e.g., DC-type or DB-type) deferred compensation plans for tax and penalty purpose. So, based on all of these down sides, is there a way at this point to change the form and timing of payment under the 409A transition rules?

A plan is either SH for a year or it isn't. In your case it isn't. ADP test is required for whole year.

Vesting...of course! But exactly *which* assets belong to a particular participant in a defined benefit plan that somehow become forfeitures that can be used to offset future employer contributions? If the assets are allocated to participant accounts, that's a defined contribution plan. To answer the original post, the employer should pay the participants the amount they are due from the plan determined as of the corrective payment date, which will include "interest." This should come from plan assets, not the company, and be reported on Form 1099-R.

Just my 2 cents, but it doesn't pass the "smell" test to intentionally overcontribute to a plan for the purpose of creating a 415 excess and therefore allowing additional deferrals to be made by HCEs. Anybody else bothered by this?

A defined benefit plan with forfeitures???

You lost me there, Harry. If the plan is grandfathered, it is not subject to Section 409A. The transition rules apply to Section 409A plans. I don't see how the transition rules could be used by a grandfathered plan. Having said that, taking away a benefit isn't a material modification, as the original posted wondered. But I wonder whether amending the plan to take out the distribution upon a COC is tantamount to allowing an extended deferral (from what it would have otherwise been without the amendment), and be seen by the IRS as a benefit.

I assume from the question that this plan is subject to 409A (otherwise status as a specified employee would be irrelevant). Taxation occurs and is reported when the distribution is paid to the employee, assuming the plan sponsor is not a tax exempt entity, in which case taxation may occur when the substantial risk of forfeiture lapses. By the way, why not have the plan provide for IMMEDIATE distributions - that way it would be exempt from 409A under the short term deferral rule, and specified employees won't be subject to the six month wait.

I agree that any further action needs competent counsel's assistance. I was merely trying to explain that unless a person is the named/default beneficiary, the Plan sponsor and third party administrator have no obligation to provide the requested information, and more importantly, no authority to make a distribution to the plan to such person.

Yes. After the Rev. Proc. The difference between your case and what the Rev. Proc. refers to is that in your case there was a valid election made (which could not be more clear). The Rev. Proc. (read it very carefully) talks about an error where the employee was not even given the opportunity to make deferrals. Look at page 59 - "the employee was not provided the opportunity TO ELECT and MAKE elective deferrals". We understand the IRS takes this literally. (ELECT and MAKE being two separate events). In your case, the employee elected, but did not actually make deferral contributions. The 50% correction was meant to be used where we don't know what the employee would have elected. In your case you know exactly what the employee elected. Self correct at the plan's risk.

Despite what you may have been told, the employer is required to pay death benefits to the named beneficiary, not what someone thinks the employee may have intended. If no beneficiary was named, the plan document will specify who is the beneficiary -- often it is the estate. If neither you nor the estate are named as beneficary by the employee's beneficiary designation or the plan document, you have no claim and are not entitled to receive any explanation or documentation from the company or its third party administrator. Harsh but true.

This has been answered in another thread somewhere, but I don't have time to look for it. The gist is that you can go the 50% route, but an IRS represenatative has advised that this is only the case if you file under VCP. If you're going self-correction (i.e. because this may be insiginificant or very recent), then the IRS will not accept the 50% as "fully corrected" and the plan remains at risk. In the absence of the VCP deal, you have a valid election form that is essentially a contract that needs to be honored, regardless of how we all feel about the employee having some responsibility to have noticed this (I know I sure would have!).

Ten years.

I agree with Kodle.

Unless final regs say otherwise, if you apply the 416(i) rules, you need to include all entities ina controlled group that includes a publicly-traded company, even if the specified employee actually performs services for one of the non-public group members.

File VCP. Employer assumes all deferring participants would have also deferred from bonuses, and makes corrective contribution plus earnings (and match if applicable). Likely can get OK from IRS to contribute 1/2 of the deferral correction under VCP.

Only if there is no other similar plan sponsored by the employer in which the participant also participates...they are combined to determine if he is a "new entrant." And also, only for compensation earned after the election is signed...which normally wouldn't be much.

My understanding of the IRS guidance on prototype plans is that they are not approved by the IRS for use by multiple employer plans. An individually designed plan can certainly be multiple employer.