Withholding on Deferred Comp. Pmts. From Entity Other Than The Employe

[Guest EMC]

NQDC Plan provides for payment to a Company's President when he steps down as President. The Ex-President will keep working for the Company as an executive after he steps down. Significantly, the NQDC is between a private foundation and the President -- rather than between the Company and the President -- even though the amounts to be paid from the NQDC are clearly being paid to the Ex-President in connection with his excellent service as President for the Company. Therefore, the private foundation, rather than the Company, will be paying the deferred compensation. The deferred compensation will be paid to the Ex-President at a time when he is also receiving wages subject to employment tax and income tax withholding from the Company in his role as Company executive.

Is the deferred compensation from the private foundation "wages" that are subject to employment taxes and income tax withholding? The private foundation is not, and has never been, the employer.

Any thoughts?

[MGB]

I vote yes, but don't have a cite to back it up.

Note that this is exactly what Enron did/is doing for all of their executives to keep that money away from the bankruptcy.

[Guest EAKarno]

Despite what the Wall Street Journal may have said, the family partnership utilized by Ken Lay did not provide any security from Enron creditors. The split-dollar life insurance arrangement itself, that was swapped in lieu of his SERP benefit, provided all the security needed. Hence, the popularity of collateral assignment split-dollar arrangements amongst senior executives.

What you have described here, however, may be far worse. Not only are there tax withholding and FICA issues, there may be serious issues of private inurement, constructive receipt, and certainly Section 457(f).

[Guest EMC]

Relax. There is no private inurement, no constructive receipt, and the plan was drafted to comply with the ineligible 457(f) rules, including that the Ex-President's payments are subject to a substantial risk of forfeiture until fully paid out (non-compete, etc.). The funds used to pay the deferred comp. have at all times been subject to the claims of the private foundation's creditors, as well.

So, my question is simply whether or not the deferred compensation payments from an entity that is NOT the entity for whom services were performed are "wages" subject to FICA, FUTA, and income tax withholding? There are "deemed employer" rules for entities other than the actual employer, but those rules already assume that the payments are "wages." There is also a rule at Treas. Reg. 31.3401(a)-1(B)(1)(i) which says that so-called pensions paid by one for whom services were not performed is a gift/gratuity. I'm trying to get a handle on the "so-called pensions" concept.

Any thoughts on this particular issue (rather than Enron)?

Thanks.

[Guest EAKarno]

For constructive receipt (really economic benefit) purposes, assets must generally be subject to claims of the EMPLOYER's creditors. Not a 3rd party's creditors.

And how can there not be ANY issues of private inurement? You have a private foundation paying compensation to someone for services NOT rendered for the benefit of the foundation.

You may be right and everything is fine. But it sure don't pass the smell test.

[IRC401]

My vote is that the payments are reportable as wages and subject to withholding by the Company because that is to whom the services were performed. The IRS will treat the arrangement as a capital contribution to the Company followed by a payment of deferred compensation.

I assume that there will be an excise tax for self-dealing and that the Company, the executive, or the directors of the private foundation that approved the arrangement will be liable for refunding the money.

I admit that I am not an expert with regard to private foundations. I strongly recommend that the private foundation get some competent legal counsel that specializes in private foundations because all of these issues (inlcuding the withholding and reproting) should have been dealt with when the arrangement was set up.

[MGB]

Wouldn't the new rules on people benefiting from a nonprofit apply here? These are known as the "intermediate sanctions" regulations recently issued.

[mbozek]

EAKARNO:Just saw your post on the Ken lay serp swap-- could u direct me to a site where I can find out about it in detail---I have clients who would be interested in this arrangement.

[Guest b2kates]

EMC, why are you so confident that the NQDC plan is not private inurement.

What is the consideration for the private foundation to incur this obligation, presumably there has been no service rendered. or not valuable service to equal the liability.

Brett

[Guest EMC]

All good comments. My original question was directed at the employment tax & withholding treatment of the payments from the Foundation to the President, and so my summary dismissal of the private inurement (and intermediate sanctions) claims were attempts to move toward getting constructive comments on the employment tax & withholding issue (which some offered, thanks).

Having said that, what makes you so sure that private inurement (or intermediate sanctions) would apply? Doesn't the payee in those situations have to be (in general terms) someone with sufficient control over the payor entity? My facts did not indicate such a relationship -- partly because none exists (and so those concepts don't apply), and partly because my question specifically sought information on employment taxes & withholding in this situation and not an analysis of whether or not private inurement and/or intermediate sanctions might apply. I.S. and P.I are interesting and I would like to know more about them both, but for the time being, I know they don't apply (and am asking others to assume that they don't) so that I can see what experiences, if any, others have had re: withholding in this situation.

Just to see if I can get back on track, would it make a difference to anyone if the payee was the President of a state university and the payor was the state university's 501©(3) educational foundation (again, the payor is NOT the "employer" of the payee for employment tax or withholdinig purposes)? In looking into this issue, I've seen that NQDC arrangements between state universities and university presidents are frequently entered into. Does anyone have any experience with, or suggestions as to, the withholding & employment tax treatment of these types of payments?

Thanks.

[Guest b2kates]

i will take a stab at the withholding requirements. It was my understanding that if it is considered wages, that it is subject to withholding.

I do not have my IRC with me but it is my recollection that 3401 mandates the withholding. Further if it is wages to avoid the Social Security impact it would have had to been earned for SS purposes in an earlier year. This is what gives rise to my concern regarding private inurement. If earned in an earlier year then no SS payment, but no consideration for the Foundation to make the payment. That is what opens the door conceptually to the private inurement argument. On the other hand if not earned prior, then subject to SS payments.

Brett