When to defer draw?

[Guest George Chimento]

Let's first look at a typical situation.

Producers working exclusively for a brokerage will typically receive a draw against expected commissions. The brokerage and the producer will agree to adjust draw from time to time, either in anticipation of a big upcoming sale or decreased volume. In theory, excess draw is refundable to the brokerage after separation, but that rarely happens in practice.

I would love to say that a producer's deferral election is timely if it is made prior to the year when the draw is paid and that draw is earned in the year when paid. In other words, treat the draw as a salary payment. However, the final regulations are specific that commission-based services are considered rendered either (1) in the year of a sale if all sales are treated that way, or (2) in the year the customer pays the premium. There is no discussion of "draw."

The issue is that if draw is treated as commission, the commission sources for the draw, advanced from brokerage general funds, actually come from many sources:

1. premiums paid to an insurance company which then pays the brokerage which them pays the producer. (This can take months and span two calendar years.) Under the regulations, the producer's services are rendered, I assume, when the insurance company gets the premium, not when the employing brokerage receives payment from the insurance company.

2. premiums paid on a payment plan (i.e. quarterly). In this type of case, I assume that each customer payment is considered a separate "sale", so services for a sale of a policy will be considered 409A "services" in each year when customer payments are made. So a sale paid for with a single premium is a 409A service in one year, and a sale paid for with monthly premiums is a 409A service in each month.

3. premiums paid in a later calendar year, against which the brokerage has advanced draw. If the draw is a commission, services are performed in the year following the payment of the draw.

The more I look at this, it just seems that draw is more like salary rather than commission, simply because it has been paid and the possible repayment obligations do not convert draw into a 409A commission for puposes of timing the deferral election.

So what's the practical way to deal with this in a 409A-compliant deferral election? Can the producer just say "defer 100% of my draw in the next calendar year" and take the position that draw is more like salary than "commissions."

George