Q/A 10 Notice 2005-1 salary deferral statement and substantial owners

[Guest cochenour]

1. Notice 2005-1 Q&A -10 contains a statement that salary deferrals generally may not be made subject to a substantial risk of forfeiture. What is meant by this statement ? Does it now prohibit normal salary deferrals under a non qualified plan?

2. Can a greater than 50% owner of a privately held company that sponsors a nonqualified plan still defer part of his salary under 409A when all of the requirements of 409A (a) (2),(3) and (4) are met? and the plan is unfunded and an unsecured promise to pay?

3. Can a greater than 50% owner still have a distribution event under a change in control?

[Guest LeeNunn]

In response to your question number 1

409A disregards certain attempts to use substantial risk of forfeiture to avoid the application of 409A. Examples include elective deferrals, convenants not to compete, and rolling risk of fofeiture. Your question is best understood in the context of applying 409A to 457(f) arrangements. 409A creates a superstructure of compliance. The rules are in addition to the 457(f) and 83 requirements.

Not for profits have used rolling risk of forfeiture, covenants not to compete, sham consulting agreements, grandfathered discounted options to (arguably) create substantial risk of forfeiture and defer taxation under 457(f) plans.

New 409A ignores all these techniques for purposes of substantial risk of forfeiture and imposes an additional level of compliance. No grandfathering for plans that, by their nature, can’t be earned and vested without taxation.

Suppose a not for profit offers a 457(f) elective deferral. Elections need to be made on time, distributions are restricted to the six events, second elections for certain events require five years deferral, offshore trusts and financial health triggers are out.

Dan Hogans pointed out that a substantial risk of forfeiture could work for 457(f) and 83 purposes, but not for 409A purposes, and vice versa.