HCE

The employer has a plan that provides all sales employees (having worked a specific number of years) will continue to receive commissions on the book of business they created as employees for several years past retirement. This is an actual plan, not individually designed agreements with the individual sales employees. Is this an ERISA plan? It clearly has an ongoing administrative scheme, it provides for a deferral of income past retirement, and provides for retirement income. Our concern is that the plan is broad-based. If it were limited to a "top-hat" group, I don't think we have an issue (because we can take some relief from the "top-hat" rules). This appears to be a pretty common type of plan, but I can't find any guidance on the topic. Is there some exception I'm not seeing?

I'm having trouble determining whether commission payments constitute nonqualified deferred compensation ("NQDC"). Under the arrangement, employees build a book of business. After they leave employment, they continue to receive commission payments for a set number of years based on the book of business they built. Is this not NQDC? From my view, the compensation is earned before employment ends. A participant in the arrangement has a "legally binding right" to the compensation at the time the employee terminates employment. It does not cease to be a "legally binding right" at the end of employment, since whether or not they get paid depends on the set terms of the arrangement (rather than discretion of the employer). One might argue there is a substantial risk of forfeiture, but that seems tenuous here, since most customers will continue receiving services from the employer, so the risk of forfeiture is not substantial. I know there are special rules for commission payments that allow you to treat the payment as "earned" when it is paid to the company by the customer. But those special rules specifically apply with respect to when a payment is treated as "earned" for purposes of making deferral elections (not the case here). So, give the above, aren't the post-termination commission payments NQDC?

Paul - Just curious. If there are W-2 issues prior to the 3 year cut off, should we just leave those alone? Say I underreported income to the federal government for my employees for the last 8 years. Should I just correct the last 3, and leave anything beyond that alone?

Buyer is purchasing Seller in a stock transaction. Seller has agreed to terminate Seller's 401(k) Plan immediately before the closing. After closing, Seller will perform final testing and make any necessary refunds. Is it possible to refund through payroll so the participant's W-2 is accurate, or must it be handled by 1099? For example: Before closing, Employee defers $22,500 in Seller Plan. After testing, Employee receives a $6,000 refund. After closing, Employee defers $6,000 to Buyer Plan. Would Employee's W-2 show $28,500 in the 401(k) Box (since payroll provider is the same), and also receive a 1099 to show the $6,000 refund? Or can we just adjust the W-2 to show $22,500 in deferrals for the year?

I agree with Peter. Rather than trying to justify why the intra-family transfer falls within the default 409A change in control definition, why not just specifically state in the plan definition of change in control that it does not include such intra-family transfers. As you stated, as long as you are narrowing the definition (which you are here), it will still be 409A compliant.

I know it's been awhile since you posted, but hopefully this helps. The Treasury has said that we don't have to use Code Y at this time until more guidance comes out. We've been waiting on that guidance for years at this point.

We have a situation where we may have failed to promptly notify a participant of receipt of a QDRO. He claims he first became aware after the QDRO was qualified (but it hasn't yet been processed, though we're about to). If true, is there a penalty associated with the failure? I assume that the AP isn't penalized and we can still process the QDRO, even if there is a penalty on the Administrator. Is this correct?

I received a QDRO where the Participant is a US citizen but the AP is not. Since the AP doesn't have a SSN, he would like to provide his ITIN instead. Are there any issues with using an ITIN or with the AP not being a US citizen? It should be noted that the AP is actively seeking citizenship, although that is no guarantee, of course. I can't think of any issues, but I just thought the community here could help me brainstorm if there is something I'm not considering. Thank you!

Thanks again, Luke!

Thank you, that is very good advice. So, in other words, the Plan language will control here and there isn't some section of the Code (or other applicable law) that mandates a certain treatment?

We had a participant in our pension plan elect a lump sum. However, he died prior to the benefit commencement date. Do we still pay out the benefit in the same lump sum amount elected (to the surviving spouse), or should it be recalculated as a death benefit (which would result in a lower amount to the surviving spouse)? Thank you!

Thank you -- I've gotten similar answers elsewhere, but I'm uneasy about it. If, at the end of the year, the bonus is not fully reported as wages, how can we treat it as compensation under the Plan? Won't it raise a red flag that the percentage of compensation deferred doesn't match the compensation reported for the year? Would it not be similar to a situation where an employee was supposed to receive $2,000/month, but the plan accidentally treated her as receiving $4,000/month and made elective deferrals on the wrong compensation?

Under our QDRO procedures, under a child support Order, the Participant is responsible for taxes owed on the QDRO distribution. Normally, we give the Participant the option of either (1) paying the tax amount out of pocket or, (2) increasing the distribution in an amount needed to cover the taxes. For example, if the QDRO award the AP $100, we can either distribute the $100 to the AP and have the participant pay $10 (10%) out of pocket, or we increase the distribution to $110 so that $100 can go to the AP and $10 can cover the taxes. We recently received a child support Order that awards the AP 100% of the participant's account. Clearly, we can't increase the distribution to cover the taxes. Do we just send the Participant a demand for payment to cover the taxes? What happens if the Participant refuses to pay?

I posted this in the "401(k)" forum, but I think it is relevant here, too. A participant made an elective deferral election of 25% of his bonus. The bonus was $4,000, so $1,000 was deferred under the 401(k). However, the bonus was subject to the participant remaining employed with our company for at least one year. The participant has chosen to leave the company after 6 months, and is required to pay back $2,000 of the bonus. How does this affect the $1,000 deferred under the 401(k)? Since half the bonus was forfeited, does that mean we have to remove half the deferral that was based on the bonus before forfeiture? In other words, do we kick $500 out of the plan? *Please note: The numbers are made up, so to the extent some de minimis rule applies to the figures above, it is probably not applicable in this situation. Some other facts: The Bonus was paid this year and is being clawed back this year. The Bonus is going to be paid back directly by the employee (we aren't reducing any compensation payments). On the participant's 2022 tax statement, it will be reported that she earned a $2,000 bonus (not the full $4,000, half of which was clawed back). I appreciate any help!

Based on the responses I'm getting, here is some additional information: The Bonus was paid this year and is being clawed back this year. The Bonus is going to be paid back directly by the employee (we aren't reducing any compensation payments). The amount in the example above is the full amount of the bonus (gross, not after tax amount). Thank you again!

A participant made an elective deferral election of 25% of his bonus. The bonus was $4,000, so $1,000 was deferred under the 401(k). However, the bonus was subject to the participant remaining employed with our company for at least one year. The participant has chosen to leave the company after 6 months, and is required to pay back $2,000 of the bonus. How does this affect the $1,000 deferred under the 401(k)? Since half the bonus was forfeited, does that mean we have to remove half the deferral that was based on the bonus before forfeiture? In other words, do we kick $500 out of the plan? *Please note: The numbers are made up, so to the extent some de minimis rule applies to the figures above, it is probably not applicable in this situation.

Thats a huge help. Thank you!

Bri - How does that work. Just by virtue of paying them in dollars we can count the money as US Pay? Then would they pay US taxes and taxes in the country out of which they work?

We have an ESOP and we would like to have certain employees outside the US participate in the Plan (the ESOP currently only covers US employees). Normally, this wouldn't even be a consideration because ESOPs normally allocate based on US income. We don't have that issue, because we allocate based on job classification. But we still have the remaining issue that allocations cannot exceed 415 compensation. Do we have any options here? Is there a way that non-US compensation can be classified as 415 compensation? If not, is there a way we can pay foreign employees so that the compensation somehow qualifies as US compensation? To the extent it is helpful, some of the foreign employees are in Ukraine, but we have others in other countries who we would also like to add as participants.

That's a good idea. I don't have the full plans, but I'll get them. Assuming that isn't an option, would a retroactive amendment work? Could we just follow the EPCRS guidance and say that trumps the Plans' terms (EPCRS says to kick out elective deferrals first).

We have a 401(k) and and ESOP. We recently had a 415 violation (one participant) that we are trying to correct. The ESOP provides that, in the event of a 415 violation, allocations under the ESOP should be reduced as necessary to not exceed the limitation. The question is, do we have to correct that way? We would prefer to give the one participant his full allocation under the ESOP and instead correct the 415 violation by kicking out elective deferrals under the 401(k) Plan. We realize this isn't in line with the plan document, but is this something we can correct by amendment (i.e. amending the plans so that a 415 violation is corrected by kicking out elective deferrals under the 401(k) rather than reallocating allocations under the ESOP)? Or do we even have to amend -- can we just kick money out of the 401(k) and say that there is no issue anymore that needs to be corrected pursuant to the ESOP language? Thanks you. Please note, the failure is for the 2021 Plan Year.

The law says that post-severance compensation can be included if paid within 2 1/2 months of severance. Our TPA wants to put it in their system that post-severance compensation is included if paid within 75 days of severance. They says 2 1/2 months is vague and potentially variable (given leap years), so their system would work better if they use a set number of days. Is this allowed? Is "75 days" a good faith interpretation of the meaning of 2 1/2 months? Or should we insist on "2 1/2 months" as the appropriate time period?

Thank you Adi and Luke -- all very helpful!

MoJo - I completely agree that the Participant's opinion is not relevant and I'm entirely confident that his claim for benefits will be denied. But, since he filed a claim under the Claims Procedures, aren't we still obligated to exhaust the Claims process in accordance with the Plan and the Law before making any distributions? Thanks!

I posted here about this matter earlier, but there have been more developments. Here is the original post: In short, the Participant kept disputing the Order, but was unable to provide anything that would prevent the Order from being a QDRO and processed. We had a valid, court-certified order and we began the procedures for processing it. Now, the Participant has started a claim for benefits under the Claims Procedures of the 401(k) Plan. Accordingly, we are putting on hold making any payments to the Alternate Payee. Is this the appropriate move? We are legally obligated to follow the Claims Procedures, but those take time. The Order does not provide for any earnings/losses on the amount awarded to the Alternate Payee, so the delay is actually costing the AP money (although, maybe not, given the market). Should we exhaust the Claims Procedures before we process the QDRO?