Just Me

This is probably a dumb answer to your question, but why would the acceleration of a stock option (presumably issued with an exercise price at least equal to the fair market value on the grant date) be a 409A issue? The stock option should fall outside of 409A entirely. In addition, accelerating the payment of 409A deferred compensation is prohibited, but not accelerated vesting of 409A compensation, even if such vesting results in an earlier payment. I agree that the $5,000 de minimis benefit is in addition to other exceptions that may also apply.

If a company is putting in a new 401(k) plan, and it owns a 100% owned subsidiary company at the beginning of the plan year that it will own less than 80% by the end of the plan year, are the subsidiary's employees counted in the minimum coverage test for that year?

I have always taken this to mean that the option was actually traded on a public exchange (I see this occasionally with stock options on a foreign parent company's stock). My understanding is that it is extremely rare for an option to be considered to have a "readily ascertainable value."

And don't forget that if it is a large plan, you may have a one day audit. Also, the 5500 will be due seven months after the end of the month in which the plan year ends -- based on your description you would have had two 5500s due in July, 2005.

The preamble to the 409A proposed regs say that a split dollar arrangment is not subject to 409A if it provides "only death benefits." What if the arrangment also provides for the payment of the underlying policy's cash value upon termination of the agreement and/or cancellation of the policy? Does this blow the exception?

Just my opinion, but I think you will need to have a "legally binding right" as a threshold step before you look at whether it's "earned and vested." Seems like you can't earn and vest something you don't have, i.e. a legally binding right.

Well, gee, it seems like the "plan" would want to know this, particulaly if the "plan" is being drafted and the employer knows that it has non-US citizens who may obtain a divorce somewhere other than Las Vegas (like maybe in Canada or Mexico). Seems like 414(p) limits it to orders issued by a State only (i.e. the U.S.). (And, by the way, this very same defintion is now being used under Section 409A for nonqualified deferred compensation plans as an exception to the anti-acceleration rule - so lots of "plans" should care.) But that's ....... Just Me.

Thanks. I had seen that provision of the Regs., but being so similar to what the 401(k) regs used to say that I wanted to make sure that wasn't also changed.

Does anyone know the answer to this one? Thanks.

The new final 401(k)/(m) regs require that gap period interest is paid on refunds of excess contributions and excess aggregate contributions (ADP and ACP failures). Is there any requirement that gap period interest must be paid on refunds of excess deferrals (402(g) limit), or is that still optional based on what the plan says? Thanks!

I believe the Treasury Department spokespeople have been very clear that a legally binding right may be contingent in nature. In other words, if X happens, you will receive Y. Looks like if clients pay the fees, the former employee gets paid, therefore I would suspect you have a legally binding (albeit contingent) right in this situation.

Except of course for things like FMLA leave, STD, LTD, etc....

JDuns - Thanks for your thoughts. The tricky part is whether you are "required" to do the auto-roll in the first place, as you mentioned: Say for example a participant in a thrift plan (after tax contributions) has this account balance upon termination, and the plan has a $5,000 mandatory cash out rule: $600 after tax contributions $200 taxable stuff (earnings, match, whatever) $300 rollover account Since his total account is less than $5,000 it is subject to mandatory cash out (similar examples could be found if the mandatory cash out level was lower). However, the taxable portion plus the rollover account (which must be considered for the auto-roll) is only $500. Since auto-rolls only apply to amounts that would otherwise be taxable (the 401(a)(31) rules), it would seem that no auto-roll is required even though the total distribution is in excess of $1,000. Do I have this right? (Anybody feel free to comment please). THANKS!

No takers? We are assuming that to the extent there are any after-tax amounts in the participant's account, they are completely ignored for the automatic rollover rule because that only seems to apply to amounts "to the extent they would be includible in income" if they were paid to the employee. So the after tax amount would be considered to determine if there should be a mandatory cash out under the plan rules, but excluded when determining if the cash out is subject to the automatic rollover rules. Any thoughts would be appreciated. Thanks.

Any thoughts on how to treat after-tax contribuitons in a participant's account for the new automatic rollover rules? Are after-tax contributions part of the "account" when determining if it's under $5,000 (or $1,000)? If an account balance is subject to mandatory distribution and automatic rollover, and it includes after-tax amounts, are those required to be rolled over with the rest of the account, or distributed? The IRS notice isn't really clear on this. Thanks all.

We have a defined benefit plan that is terminating and we are putting together the Notice of Plan Benefits. Can we advise participants that their choice will be between a lump sum and an annuity to begin paying monthly as soon as the plan termination is approved, or do we have to offer them an annuity payable beginning at their retirement date, too? Thanks.

OK. Those rules apply if the reason for the transaction is to evade liability. That is not the reason for this transaction. The employers are very different (one for profit, the other not) and have very different objectives with respect to providing retirement benefits, so they have agreed to split the plan into two plans so that each company can tailor its benefits to suit its own retirement plan needs. The plan is being fully funded just prior to the split so there will be no unfunded liability at that time. The question becomes whether the original sponsor is liable in any way for a future unfunded liability in the spin off plan if the subsidiary that spun off is later sold out of the controlled group (when the spin off plan is still fully funded) and following that the plan incurs a distress termination. Seems from reading ERISA that the determination of the liable controlled group members is made as of the date of the distress termination, with no "look back."

We have a multiple employer DB plan. One of the companies in the controlled group wants its own plan, so we are spinning that portion out to a new stand alone DB plan for that company. Suppose a few years from now we sell that company and it is no longer part of the controlled group. Subsequent to that, the company has difficulty and ends up in a distress termination. Can the PBGC come back to us as the prior parent if the new entity is no longer in the controlled group when it suffers the distress termination? Thanks for your thoughts!

Thanks. It sure does smell the same. (pun intended).

Has anyone looked at something called the "Rainmaker Plan" that is being promoted as a way to use qualified plan assets to finance a small business? It doesn't appear to be an ESOP. Thoughts?

After further pondering on this issue, I think what Notice 2005-1 is saying is that any plan adopted after 10/3/04 is considered to be a materially modified plan, and therefore subject to 409A. I do not believe that the Treasury Department intended that any new plan adopted would somehow materially modify an existing plan sponsored by the same employer.

I don't believe the adoption of a new plan would be considered a material modification of an old plan (I think you need to look at the phrase "under an existing arrangement" in Q&A 18(b) as applying to the whole sentence, not just the part about the new grant - and look at the difference between the word "arrangement" and the word "plan"). However, a plan that is effective January 1, 2005 does not enjoy the transition period for salary deferral elections to March 15, 2005, because it was not in existence as of December 31, 2004. Therefore, yes, salary deferral elections with respect to services provided in 2005 for new plans must have been made no later than December 31, 2004. However, since all participants are "new" it is possible that the special 30-day rule would apply, so that salary deferral elections could be made by January 30, 2005, with respect to services not yet performed (i.e. it would need to be prospective). Note that this was discussed in yesterday's JCEB presentation, and the Treasury speaker (Dan Hogans perhaps) said that he wasn't so sure the 30 day rule applies in this case, an you would need to rely on it as "good faith" compliance with the rules, "if you think that is good faith."

The Plan is silent as to what options are avialable upon termination. Weird, I know, but true. The employer doesn't want to cash out anybody who is still employed. They don't want employees "blowing" the money, but to have it available if they terminate or retire later. So, if possible they'd like to offer the "lump sum" but only in the form of a direct rollover to the 401(k) plan. Can a lump sum be limited in this way?

I have a defined benefit plan that permits lump sums as a distribution option. The plan will be terminating shortly. Since a lump sum is not normally available until the participant terminates employment, can we offer actively employed participants the choice of receiving an annuity contract from the insurance company (which would have a lump sum option upon termination from employment) or a direct rollover to the company's 401(k) plan (which would allow a lump sum upon termination from employment)? OR, does the fact that a lump sum is an option under the plan mean that we must offer a lump sum upon plan termination, even though participants selecting annuities won't be payable under the contract until normal (or early) retirement date?

The statute seems to say so. If it's paid within two and 1/2 months, it's not deferred compensation (and therefore not subjec to 409A rules). On the other hand, if it's paid after two and 1/2 months, it isn't automatically deferred compensation, based on the facts and circumstances of the payment (e.g. is it subject to a substantial risk of forfeiture - if so, 409A does not apply according to its terms). Good news is that regs will be out very, very soon, and perhaps we'll find more clear guidance then.