HCE

We have a transaction where a disqualified individual under 280G is getting stock options from the buyer. These will be granted contingent on the change in control, but they will not begin to vest until a year after the closing, and then only monthly over several years. I understand that they are granted contingent on the change in control, but does the fact that they are unvested, and won't even begin to vest for a year, make a difference?

I recognize that there are other considerations here. The IRS stance on 409A corrections is too rigid, and the executive should have collected. But does anyone have any guidance regarding how to report this according to current IRS guidance? I'm particularly interested in how to correct far-back errors. Say the account was in violation of 409A as of 2015 when it had $100k in it. For simplicity, lets say there were no earnings or additional contributions since then. Do I really go back and correct 2015 taxes (as if it were paid in 2015)? Can I even correct 10-year-old tax forms if I want to?

A follow up question: Say Employee deferred $100,000 in 2018. Due to earnings, that $100,000 is now worth $150,000. How do we deal with the extra $50k? Is it also reported as paid back in 2018 with penalty? Is the $100k reported as paid in 2018 and the earnings ($50k) reported as paid now? Do we need to calculate the earnings for every year from 2018 to today and report/correct for each year accordingly?

Employee made elective contributions in 2018 and 2019. He should have been paid in 2021, but was not -- it is too old to correct under the correction procedures (Notice 2008-113). So we definitely have an uncorrectable error. The employer is not interested in ignoring it and hoping it never gets discovered -- they want to fix it now. I know we have to report it as a 409A violation and there will be a 20% excise tax. But do we have to go back and report these as if the contributions were actually paid in 2018 and 2019? Can we even go back that far? To make matters worse, the participant also has older contributions (going all the way back to 2001) -- how do we handle those? Can we just pay out everything now (2025), report it as a 409A payment, and pay the 20%? Do we have to go back and report the contributions as paid in the year the contributions were made?

We have a level-funded plan. Some employees pay a portion of the premium (those in HSAs), but it is mostly employer paid. We are expected to have a refund/surplus this year. Do we keep it, or are we required to allocate it to employees? If we are required to allocate to employees, is it just to those who pay premiums on a pro-rata basis? If employee's paid 10% of the premium, and employer paid 90%, do we allocate 10% to employees? As much guidance as you can give, I'd be grateful for!

I'm having a lot of trouble with the 280G rules. I have a Disqualified Person who is 100% vested in separation pay. If the DP leaves for any reason, she gets a big payment. She also gets the same big payment (same $ amount) if she is terminated within 6 months of a change in control. We are going to have a change in control and she is going to be terminated. I don't know if the separation payment should be included in the parachute payment calculation. On one hand, she is already vested in the total amount of the payment and would have received the payment upon termination regardless of the CIC. On the other hand, she is being terminated in connection with the CIC, so the payment is contingent on an event related to the CIC. The question is, does the payment go into the parachute payment calculation? Since she was already fully vested in the payment, is there some discount on how much is included in the parachute payment calculation. I know the regulations provide rules for "vested" amounts that are accelerated due to the CIC, but I don't know if that applies here -- and even if it does apply, we have no idea how much the payment was accelerated, since we have no idea when termination would have occurred if not for the CIC (would she have worked 5 more years? 15?). Unfortunately, it gets more complicated than that, but the above is the "easy" version of the issue. I would really appreciate any insight (with the recognition that no one is providing legal advice).

Can someone please confirm that employer contributions to a nonqualified plan are subject to FICA taxes at the time they vest? We recently found out our payroll isn't applying FICA taxes to our employer contributions to our NQDC Plan (in our plan employer contributions are always 100% vested). They claim this is correct, so I'm second guessing myself. My understanding is FICA taxes must be paid under the "special timing rule" when contributions to a NQDC Plan vest, even employer contributions. If they aren't applying FICA upon contribution (or, if later, vesting) we'll have to apply FICA to the employer contribution part of the distribution later, correct?

Incredibly helpful Brian. Thank you!

We have an employer that runs a LSA and they have been allowing reimbursement of medical expenses. We understand this practice makes the LSA a health plan, subject to COBRA (we don't even want to think of the other compliance headaches -- ERISA, HIPAA -- at this point). Assuming the above, should the employer start offering COBRA on the LSA? If the employer offers COBRA, is the entire LSA required to continue during the COBRA period, so just the medical reimbursement portion? In other words, say the LSA provides for reimbursement of non-medical and medical expenses, during COBRA could the employer limit reimbursement only to medical expenses, or do non-medical expenses have to continue to be reimbursed, too, since that is what is allowed under the LSA during employment?

A client has been paying out employee deferrals from a NQDC Plan and reporting them on Form 1099 for years. The client will correct this going forward and start reporting on W-2. However, do we need to go back an correct for previous years when they used 1099? If so, how far back do we need to go? Unfortunately, I don't know at this time if FICA was ever accounted for.

Sorry for the delay. It is an ERISA DB plan, and we are talking about a separate interest division. Can the QDRO expressly limit who the AP can name as her beneficiary (e.g. "you can't name a new spouse" or even "you must name our shared children")? Can the Plan refuse to qualify an Order that has those express limitations, and instead take the position that once the AP has her own interest, she can name whoever she wants as her beneficiary?

I have seen QDROs that provide an Alternate Payee is prohibited from listing a new spouse as beneficiary. Is this typical? Is it allowed? Can a plan refuse to allow this, and instead just say, "once the AP has his/her own account, he/she can name whatever beneficiary he/she wants?" We would prefer to just divide the account and not have to keep track of additional restrictions like this. But we will if we are required to. Does it make any difference if the plan is a DC or DB?

Can profits interests be granted to non-service providers? If so, how do those work? Alternatively, can unit appreciation rights be granted to non-service providers?

We have a client with a 401(k). The client does not want to hire an investment consultant. Instead, they are looking for a resource for where to get a report of metrics for the investments in the Plan so they can do this work themselves. Does anyone know of a good resource for this? I understand the benefits of an investment consultant and they have been communicated to the client, but this is their decision.

Our ESOP lays out the statutory requirements for distributions. Our Distribution Policy has the details. Can we literally just change anything in the Distribution Policy as long as we stay within the statutory requirements? For example, the ESOP says we can require participant to wait until the plan year that is five years after the year of employment termination. The Distribution Policy says we will distribute small accounts (say, $10,000 or less) in the year following separation. Can we change the Distribution Policy to say all accounts (no matter what size) have to wait five years? This still complies with the statutory requirements and is consistent with the ESOP language, but is it a problem that we are treating similar employees differently (i.e. small account balance participants have very different treatment before and after the Distribution Policy change)? Thank you!

Scottalaniz - Did you ever figure this one out? I'm in a similar situation.

According to my understanding, if a person earns compensation and defers under a NQDC plan in state A, but then retires and moves to state B, state A can't touch the money unless it is paid out over 10 year (since state A is not the domicile -- see code section 114). What if a participant has deferred compensation from 2022 to be paid out in a lump sum. from 2023 to be paid out over 15 years. Should 1 be taxed in state A and 2 be taxed in state B? Or do we look at plan benefits as a whole, and tax it all in state B? EDIT: I guess another question is this -- if we look at the plan benefits as a whole, they are paid out over 10 years, but they are no longer substantially similar payments (since half is paid in a lump sum and half over 10 years). So does that mean NONE of this qualifies as retirement income under Code Section 114?

We have a 403(b) Plan that is a multiple employer plan (MEP). Under SECURE 2.0, new 403(b) Plans (established after 12/29/2022) are required to include auto-enrollment/auto-escalation. Would this apply to new employers who join the MEP? The MEP itself is not a new plan, but would a new employer who joins the MEP be considered to have started a new plan by joining the MEP? Are there any exceptions or ways out of this new requirement? While different employers in the MEP do have some flexibility regarding the MEP, its much easier if the MEP is mostly uniform across all participating employers (so having auto-enrollment/escalation for some and not others makes it more complex to administer). While we're at it, is there any way around the Long-Term Part-Term rules? I don't think so, but figured I'd ask while I'm here. EDIT: According to Notice 2024-02 (https://www.irs.gov/pub/irs-drop/n-24-02.pdf), it looks like an employer joining a MEP after 12/29/2022 is treated as starting a new plan. There is a possible exemption if the employer joining the MEP already had a pre-12/29/2022 plan and is treated as merging into the MEP, the employer can treat the MEP as a continuation of the older plan, rather than a new plan. I think this answers my question -- whether you agree or disagree I appreciate your comments!

Thanks for the guidance Brian!

We have a H&W Benefits issues resulting from some restructuring. Parent has two subsidiaries, A and B. Some of the employees of A are going to be transferred to B and paid under B's EIN, however, they are going to remain participants in A's H&W benefits. As a result, B will have a group of employees that participate in B's H&W benefits and another (new) group of employees who participate in A's H&W benefits (former A employees). What, if any, are the issues with this type of structure? What should my concerns be? Is this allowed? Is everything okay, so long as we are able to pass some sort of testing? (I don't do much H&W work; I primarily deal with retirement benefits, so anything you can think of will be helpful). Thanks a ton!

We have an ESOP where a participant can take a distribution after termination and they can sell the shares to the company. Unfortunately, this is no longer sustainable, as we are having to repurchase shares at such a rate that it isn't feasible for budgetary reasons. We want have been advised we should revise our distribution policy. This makes sense -- if we can delay distributions, we can delay repurchases. We want to do this for all non-terminated participants -- is that okay? I found some guidance saying this works, and even some that says it might even work for terminated (non-payment status) participants, but that's unsettled. I think the best option is to set a "lump-sum threshold," but I can't find any guidance regarding how to set that dollar amount. Are there limits, or can we just set it at any amount we want? I am aware that we are limited to five years of installments (unless over that ESOP threshold, but we don't have balances in excess of $1m), but are there any limits on how low we set the lump-sum threshold to be able to pay over the five years? Is there anything else I'm missing? Is there a better way to fix our repurchase obligation issues?

I agree with CuseFan that no re-registration is needed. There is some debate over whether a new arrangement requires registration, with some saying it is not required. I've always taken the position that best practice is to register new plans because the registration is so easy and it's not worth the downside of failing to register in the event it is determined that it should have been done.

We have a very standard NQDC Plan. Section 409A-compliant. Elective deferrals and employer contributions. Are there any risks that a standard NQDC Plan can make the company/sponsor subject to any Securities Law or Blue Sky Law (Federal/State) requirements?

Situation 1 - Rehire Full-time employee is eligible and participating in the 403(b). The employee experiences a separation from service and there is no plan to re-hire employee. Employee ends up being re-hired later in the same Plan Year, but in an ineligible position (fewer than 20hrs/week). Does the employee get to participate immediately under the "once-eligible, always eligible" rule? Situation 2 - Reclassification Full-time employee is eligible for the 403(b). The employee changes from full-time to part time (expected fewer than 20 hrs/week). Is the employee still eligible under the "once eligible, always eligible" rule, or is the employee now ineligible under the exclusion for employees expected to work fewer than 20 hrs/week?

We accidentally treated part-time employees as excluded from the Plan. Luckily, this problem is only recent -- we didn't have any part-timers until last year (which partially explains why we didn't know how to treat them). Based on our calculations, to correct for these employees (there are only 4 of them), we are looking at small QNEC amounts -- at most $400, but as little as ~$100. These employees don't currently have any accounts -- do we need to create accounts and contribute these small amounts to each of them? Is there a rule where we don't have to make QNECs (and open new accounts) if the amount is below a certain threshold? I know there are de minimis rules for overpayments and excess amounts, but I don't see anything for QNECs related to improperly excluded employees. I appreciate any guidance.