409(p) and 4979A - a question

[Guest MikeD]

Assume an S Corp has an ESOP that owns 60% of the stock of the company. The remainder is owned by individuals. No stock will be allocated to a "disqualified person" because those people are excluded from participating in the Plan. The individual owners are receiving payments of nonqualified deferred compensation (although they will never receive ESOP allocations). I think it is clear that the Plan will not violate 409(p); however, it seems that there is a problem with 4979A(a)(4). Because these individuals have nonqualified deferred comp interests (synthetic equity) and there would be a nonallocation year (although no stock is allocated to the individuals), does that mean that they now are liable for a 50% excise tax? (I know they can distribute the nonq deferred comp by 7/21 and avoid the problem, but this still doesn't seem right).

Thanks.

[BeckyMiller]

Yes - there may be a nonallocation year in this situation. Realize that this rule was established to avoid abusive situations where the value of the company is drained by deferred compensation to the disadvantage of the ESOP shareholders. As the proposed/temporary/final regulations under Section 409(p) are currently drafted there is no exception for reasonable amounts of deferred comp., pre-existing contracts, etc.