Easy One about Determining Constructive Receipt

[Guest btous]

I'm not an expert by any means in the area of NQDC, but know just enough to be dangerous...I'd previously heard that there were several circumstances that could put a NQ plan (or the NQ participant) at risk for taxation for amounts deferred on behalf of the participant.

Assuming it's a program that looks like a 401k and recordkept by a professional recordkeeper, I think I'd heard that having participants exercise 'too much control' (perhaps as in daily transaction access capability), and/or having the participant accounts 'fully funded' (with the mutual funds tracked) were indications that the participant exercised control that could result in constructive receipt.

There may be other conditions that were mentioned as well, but I suspect that those were the two that drew my attention the most...

Are those two things mentioned (daily access and full funding) real issues for NQ plans? Thanks for any info.

[Guest EXB 1]

Having access to view or reallocation accounts does not impact constructive receipt. Whether the plan is funded or not is an issue. To maintain tax benefits, the plan cannot be formally funded, although it can be informally funded. There are a host of other issues that can impact constructive receipt, the timing of elections to defer compensation is extremely important. Tax Facts is a good resource to reference regarding taxation of NQDC plans.

[Steelerfan]

I suspect the major issues you refer to as "too much control" meant too much control over payout form and timing, such as a provision for in-service or earlier withdrawals if the exec gives up 10% of the benefit (a "haircut") and subsequent deferral elections, such as a redeferral of an amount already deferred. The IRS originally ruled that the ability to direct investments caused receipt of income under a "dominion and control" theory (1977 GCM). Subsequently the IRS changed its mind and ruled that investment direction of hypothetical accounts does not cause income recognition under either the constructive recept or economic benefit doctrines, thus abandoning the dominion and control theory.

The "fully funded" controversy generally had to do with abuses surrounding rabbi trusts, such as funding triggers prior to insolvency (the ridiculous "rabbicular" trust), or other mechanisms to try and get around the requirement that amounts in a rabbi trust be subject to the claims of the general creditors of the company.

Section 409A and the regulations now prevent these types of provisions and actions that probably did violate the constructive reciept rules, but for which the IRS had generally decided not to press after suffering a series of defeats in the tax court. After Enron, the IRS no longer had to worry, as Congress went much further in restricting deferred comp than the IRS ever could have or even wanted to. Participant directed investments of hypothetical accounts is still ok under 409A, however.

After 409A, constructive receipt is still an issue, but much less of an issue due to the strict deferral rules and outright ban on funding triggers contained in 409A.