6 Month Delay

[XTitan]

1) Key employee intends to separate from service on June 30, 2008. Since distributions may not be made prior to the date which is 6 months after the date of separation, what's the earliest date payment may be made without violating 409A (not the safest date), based on the based available guidance?

a) December 30. 2008

b) December 31, 2008

c) January 1, 2009

2) Suppose the payment is not actually made until January 15th. What is the month of constructive receipt for 451 purposes?

a) December 2008

b) January 2009

Assume there is no collusion between employer/employee to determine the timing of the distribution for tax year purposes. I have a hunch that there is an argument that the employee can be constructive receipt in 2008 without violating 409A.

[Just Me]

OK, I'll bite...

I say December 30, 2008. That is the date that is six months after the date of termination, before which the amount cannot be paid.

It would be taxable when received by the employee (in December). Constructive receipt would only apply where the employee "turned his back" on the income, in other words, he had the ability to demand payment in December but did not elect to do so, or elected to defer to January.

I'm sure reasonable minds will have other reasonable interpretations.

[XTitan]

It would be taxable when received by the employee (in December).

No fair changing the question - the payment is in January. .

[rcline46]

I would opine that in the eyes of the IRS, 6 months is 6 months, not some number of days. Therefore the end of the 6 month period is December 31, and if payment is AFTER 6 months, it will happen in 2008.

[masteff]

XTitan - Is there some other benefit or program that makes the employee need to terminate employment on the last day of a month? If not, since June 30 is a Monday, why not suggest the employee terminate on Friday June 27? I know I'd rather not come back for a single day if I could avoid it, especially w/ that being the week of July 4th.

This would avoid the question of whether you start counting from June 30 (arriving at the day after Dec 30) or from July 1st (arriving at the day after Dec 31). (Arguably, if you start counting from July 1st, then you'd count the whole month of December and not just 30 days of it as rcline rightly points out we're counting months and not days.)

[XTitan]

XTitan - Is there some other benefit or program that makes the employee need to terminate employment on the last day of a month? If not, since June 30 is a Monday, why not suggest the employee terminate on Friday June 27? I know I'd rather not come back for a single day if I could avoid it, especially w/ that being the week of July 4th.

This would avoid the question of whether you start counting from June 30 (arriving at the day after Dec 30) or from July 1st (arriving at the day after Dec 31). (Arguably, if you start counting from July 1st, then you'd count the whole month of December and not just 30 days of it as rcline rightly points out we're counting months and not days.)

Let's say the separation date has to be June 30, so we can't avoid the question. The way I read 409A(a)(2)(B)(i) is that the payment cannot be made before 6 months following separation, so it can be made on the 6 month anniversary (monthaversary?). I know the regs permit the payment to be made on the 1st day of the seventh month following separation, or each payment can be delayed 6 months. That doesn't help determine the 6 months. I'll chalk this one up to needing more guidance that likely won't happen.

It's a curious thought as to whether the payment that should be made in December but isn't made until January creates tax in 2008. Is the "should" enough to trigger constructive receipt in the same way as "you were paid 12/31, but the check was in the mail." I can imagine instances where a participant might want to be taxed in 2008 while another in 2009. An interesting intellectual exercise.

[Just Me]

Oops. I didn't mean to change the question. If the payment is in December 2008, it's taxable in 2008, if payment is made in January, it's taxable in 2009 (unless we have a collusion/constructive reciept issue).

However, the "six months" is still an undefined quandry. Did rcline mean to imply that this would always be the END of a month? What if he terminated today, June 4th? I would think December 4th would be the "six month" date.

Yes, great intellectual exercise, but you KNOW this is going to happen....

[masteff]

Oops. I didn't mean to change the question. If the payment is in December 2008, it's taxable in 2008, if payment is made in January, it's taxable in 2009 (unless we have a collusion/constructive reciept issue).

However, the "six months" is still an undefined quandry. Did rcline mean to imply that this would always be the END of a month? What if he terminated today, June 4th? I would think December 4th would be the "six month" date.

Yes, great intellectual exercise, but you KNOW this is going to happen....

December 4th would be the last day of the six-month exclusion period. So the distribution could be made on or after December 5th. You can't count June 4th as the first day of the six months because the employee is actually at work that day; June 5th would be the first day of the post-employment period.

It's worth noting that in one place the regs use the phrase "on the first day of the seventh month following the date of separation from service". So you don't distribute on the last day of the six months, you distribute after that.

The problem in the OP is that it's specifically a month-end scenario. As I stated above, the question is do you start counting from June 30 (with distribution the day after Dec 30) or from July 1 (with distribution the day after Dec 31). I'd argue that you'd start from the first day of the post-employment period, July 1.

[Just Me]

Thanks masteff. I see the reference to the first day of the seventh month in the regulations with respect to holding installment payments during the 6 month period, as an example of an acceptable time to pay these. I also see the phrase "...payments may not be made before the date that is six months after the date of separation from service..." in the general provisions regarding the requirement for the six month delay. I think this is what the OP was focusing on...what is the date that is six months after the date of separation from service? If the employee terminates June 30th, then it seems that June 30th is his separation from service date -- not July 1 [perhaps we disagree on this point]. So the question is, what is the date that is six months after the date of separation from service? And this date (which I think may be December 30th), is the date upon which payment cannot be made BEFORE according to the regs. It's important to note that the regs don't say it has to be made FOLLOWING the date that is six months after the separation from service, but that it can't be made BEFORE that date. So if the payment is made ON THE DATE that is six months after the separation from service, it doesn't violate the rule. Of course, December 31st would be safer than December 30, but the OP asked that we speculate on what the earliest date for payment would be, not the safest date.

[XTitan]

Yeah, curse that OP!

Normally of course it doesn't matter - it's the possibility of crossing the tax year that may reach a tax result (timing of the year of income inclusion) that is either favorable or unfavorable to the key employee. I thought the potential for triggering constructive receipt for inclusion in the current year while making the actual payment in the following year, thereby creating taxation under 451 without 409A penalties, an intriguing situation.

Now let's amend those plan docs to say 1st day of 7th month following separation and move on to more important dialogues.

[Steelerfan]

If the payment trigger is separation from service and the six month rule pushes you to the end of the year (4Q), I thought the regs gave the flexibility of paying no later than the 15th day of the 3rd calendar month after the earliest date payment could be made.

not sure if there really is a constructive reciept issue. this looks like a rare instance where we actually have a post LBR choice as to tax year. I could be wrong but I think the IRS has basically "given" us a one year pass for many situations, one being the short term deferral rule and another other being the "late in the year" payment rule.