Six-Month Delay for Gross-Up Payments?

[BTG]

If a non-qualified plan makes a gross-up payment to a specified employee for federal income taxes owing because of participation in the plan, is the plan required to wait six-months because of the delay requirement for specified employees?

I see that payments on account of state, local, and foreign taxes are subject to the six month delay (1.409A-3(i)(2)(i) doesn't exempt them as it does payments of FICA taxes). However, I don't see a provision similar to 1.409A-3(j)(4)(xi) (relating to state, local and foreign tax payments) that deals with federal income taxes.

Any ideas? Am I failing to see the forest through the trees?

[Steelerfan]

I think the regs consider gross ups to be deferred compensation, so yes, the delay rule would apply. Sorry I don't have a cite.

[Guest Harry O]

The six month delay only applies to payments made on account of termination of employment. An in-service gross up is not subject to the six month delay and is more than likely not even deferred compensation if paid on a timely basis.

[Steelerfan]

I assumed he was terminating. Why is the exec entitled to a payment or was there was a 409A failure?

The preamble to the final regs states:

"The final regulations provide that a right to a tax gross-up payment is a right to deferred compensation that satisfies the requirement of a fixed time and form of payment if the plan provides that the tax gross up payment will be made, and the payment is made, by the end of the service provider’s taxable year next following the service provider’s taxable year in which the related taxes are remitted to the taxing authority."

In the 280G context, a gross up becomes a parachute payment itself subject to the excise tax. Based on the preamble language, I would not be surprized if the IRS were inclined to treat gross ups as a part of the deferred comp package and thus subject to the 6 month delay rule for specified employees who receive a distribution on separation from service.

As a practical matter since a terminated specified employee wouldn't have any FIT liability until 6 months later when he receives his distribution, does it make sense to gross him up before 6 months anyway? Keep in mind that the reason an acceleration for FICA is pervasive is that FICA taxes become due on the later of performance of services or lapse of SRF. So you need special provisions to pay FICA early since it will always be due before distributions. But you don't really need special provisions to do a garden variety gross up, except to pay it timely, as Harry O says.