Grandfathered and not?

[Guest tintree73]

Please let me know if I am crazy on this one:

We have two agreements. One signed on 12.1996 and one on 12.2004 (different people).

Once signed in 1996 - ex-exec signed it, company took deduction, ex-exec included full amount in income tax (payments last for 10 years). We are taking the position that this entire agreement is grandfathered out of 409A.

Second agreement signed in 12.2004, ex-exec included full amount in income tax for 2004 (and the benefit is payable over ten years); however, this appears to be a material modification after 10.3.2005 - but is it a no-harm, no foul b/c he paid the tax? Do we have to do anything further at this point (amend the plan, etc.)? There is a non-complete (which I understand is generally ok - but there is also a confidentiality provision).

Thank you for any assistance on this. They will not let me call legal and I want to make sure we do not make a mess out of all of this. I won't hold you to any response, just want to see if we are going the wrong way on this.

[WDIK]

They will not let me call legal

Who is "they" and why not?

I am paranoid by nature, so comments like this tend to raise red flags for me, like there is more to the situation than someone is letting on.

(By the way, is it paranoia if they really are out to get me?)

[QDROphile]

So what about the arrangement is not compatible with 409A?

[JDuns]

409A deals with deferred compensation and accelerates the TAXATION of certain non-compliant plans (subject to penalties).

In the situation described, the employee has paid all taxes (I assume federal income and FICA as well as state and local income taxes) and there is no further deferral of taxation but there is deferral of payment. If that is true, 409A would not apply.

However, typically there has been payment of the FICA and local taxes and the income taxes are payable as payments are made. In this situation, 409A would apply and the 12/2004 plan would not be grandfatherable.

Hope this helps.

[Guest Harry O]

What kind of plan taxes an employee on 100% of his benefit and then pays it out over 10 years???? More information on the nature of the plan is needed.

[Mark Whitelaw]

Harry O - Bonus plans used as an alternative to a SERP do this. Sometimes, like Delta, they use a Secular Trust. It's been used with risky industries (Airlines, Tobacco) for years. The participant is made tax nuetral to the bonus at the time of the employer contribution, but the after-tax income is paid out based upon performance/tenure/etc criteria.

[Guest George Chimento]

I'd be very concerned about 409A compliance for your post October 3, 2004 plan.

It sounds like this is either a 457(f) or 402(b) arrangement. Tax is on the present value basis, and investment earnings are taxed thoughout the payment period under Section 72.

If there is a 409A failure, all of the vested amount not previously taxed is subject to 409A penalties. You will trigger 409A penalties if you do not amend by 12/31/05, because 402(b) and 457(f) arrangements are specifically covered by 409A. (If what you had was a transfer of property under Section 83, you don't have to worry, but is does not sound like that from your facts.)

George Chimento