Substantial Risk of Forfeiture

[CTipper]

How are you defining this in your documents?

Can it be something as simple as 0% vested while employed and then they become 100% vested upon separation of service?

thanks

[QDROphile]

So what would cause the forfeiture?

[CTipper]

So what would cause the forfeiture?

Well, to be honest with you, that was my question.

Before I had started looking in this particular scenario, I had heard that a good "safe harbor", if I may use that phrase in a NQDC setting, is to have a 5 year graded vesting schedule on each contribution. Each contribution takes 5 years to vest.

Does that sound reasonable? Is there a shorter time span that would satisfy the risk of forfeiture clause? Or does it need to be longer?

Thanks

[namealreadyinuse]

That is not a substanital risk of forfeiture for either 83 or 409A.

[E as in ERISA]

Why wouldn't a requirement of five years of service be considered an SRF under 83? Or 409A?

See Section © of regulations http://a257.g.akamaitech.net/7/257/2422/10...26cfr1.83-3.htm And examples indicate that requirement to remain in employment for a period of time is a risk of forfeiture.

[jpod]

It's kind of hard to answer the original question without knowing what risk(s) of forfeiture the employer wishes to impose. There is no reason (409A or otherwise) why deferred comp. must be subject to a srf. Am I missing something?

[jpod]

I may have jumped the gun on my original post.

By any chance are we talking about an arrangement subject to 457(f)?

[Ron Snyder]

Our plan provides no vesting until the participant's NRD, and 100% vesting at NRD, as provide below:

"FORFEITURES

For a Participant who incurs a Severance of Employment prior to his Normal Retirement Date, Disability or death, or to a Change in Control, any amounts in his or her Nonelective Employer Contribution Plan Account will be forfeited and refunded to the Employer or applied as directed by the Employer." [Other sections deal with NRD, Disability, death and Change in Control.]

The only reference to "substantial risk of forfeiture" in our plan occurs in the following section:

"TERMINATION OF ARRANGEMENT BY ADOPTING EMPLOYER

An arrangement may permit an acceleration of the time and form of a payment where the right to the payment arises due to a termination of the arrangement in accordance with one of the following:

(a) The service recipient’s discretion under the terms of the arrangement to terminate the arrangement within 12 months of a corporate dissolution taxed under section 331, or with the approval of a bankruptcy court pursuant to 11 U.S.C.503(b)(1)(A), provided that the amounts deferred under the plan are included in the participants; gross incomes in the latest of –

(1) The calendar year in which the plan termination occurs;

(2) The calendar year in which the amount is no longer subject to a substantial risk of forfeiture; or

(3) The first calendar year in which the payment is administratively practicable."

[Guest Harry O]

Everybody eventually separates from service for one reason or another so there is no risk of forfeiture here.

If this is your first NQ plan, I suggest that you get some experienced assistance. This is especially true now that we have 409A to contend with . . .

[CTipper]

Thanks everybody for helping.

The employer will want to impose the minimum level of SRF on the employee elected deferral portion. On the employer funded portion they may want it to be higher than the 5 year example. We haven't gotten that far.

I have not yet had a chance to read the site that "E" shared.

And, yes, I know I need some (ok, a LOT) of help. However, after I posted this I chatted with one of my regular referral sources and found out that he does quite a bit of this stuff. He said that their view on it was that by simply having the assets at risk -- that they are the general assets of the employer and that this is not a "funded" arrangement -- constitutes an SRF.

You guy's are disagreeing?

[Guest Pensions in Paradise]

I chatted with one of my regular referral sources and found out that he does quite a bit of this stuff. He said that their view on it was that by simply having the assets at risk -- that they are the general assets of the employer and that this is not a "funded" arrangement -- constitutes an SRF.

I think its time to find a new referral source.

[Guest Harry O]

Yes, I disagree. Your source doesn't understand 409A and I question if he understands section 83 either.

That said, there is no need to have a SRF under 409A. I can defer 20% of my bonus in Year 1, have it fully vested (it is, after all, my money!) and then have it paid out in Year 10. There is no SRF anywhere. But as long as my initial deferral and payment date elections were made timely (and the plan otherwise complies with 409A -- e.g., no acceleration opportunities, 6 month delay for termination payments to insiders, etc.), i should be o.k. under 409A.

[Kirk Maldonado]

Section 409A provides in relevant part:

If at any time during a taxable year a nonqualified deferred compensation plan—

(I) fails to meet the requirements of paragraphs (2), (3), and (4), or

(II) is not operated in accordance with such requirements,

all compensation deferred under the plan for the taxable year and all preceding taxable years shall be includible in gross income for the taxable year to the extent not subject to a substantial risk of forfeiture and not previously included in gross income.

[CTipper]

okay guys

Despite my best efforts, I guess I'm going to have to breakdown 409A and 83 myself.

I'm just having a hard time reconciling where I read on the IRS website and their audit guidelines how you have to have an SRF, but Kirk is saying we don't

I'm not trying to offend or annoy. I am trying to comprehend and this is taking a bit.

thanks

Christopher

[namealreadyinuse]

Two points.

1)

The employer will want to impose the minimum level of SRF on the employee elected deferral portion

I believe the new IRS position in the 409A regulations is that employee salary deferrals cannot (or at least usually cannot) be made subject to a SRF, but I don't think your goal is really to establish a SRF.

2) What do you want to accomplish? Tax deferral? No need for SRF unless it is a tax-exempt or governmental employer (457(f) plan). All you have to do is avoid constructive receipt and economic benefit. That is what this is about:

that they are the general assets of the employer and that this is not a "funded" arrangement

.