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457(f) Plan - Substantial Risk of Forfeiture


austin3515

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Can anyone point me to something that says that the following works:

Participant is vested if they continue employment on a substantially full time basis until age 65. Participant will be 100% vested immediately upon the occurrence of any of the following: death, disability, termination without cause.

Can I say:

termination with or without cause?

I think the employer wants the incentive to be for the Participant to stay, but if on the other hand it is the employer who wants him to go, they want the participant to vest at that time.

Austin Powers, CPA, QPA, ERPA

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The whole point is HE quits, they want there to be a forfeiture. Besides if he could just quit to become vested, clearly there is a not substantial risk of forfeiture. I guess the point is the likelihood of not forfeiting needs to be "remote" (to use a word that I've read) that he will get the money before the future service component is met. So for example death and disability (God willing) should always be considered remote. Being fired for any reason at all, with or without cause?

Austin Powers, CPA, QPA, ERPA

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How about "employer-activated termination without cause"?

If the employer has cause, do they really want him to become vested? Because he could show up everyday, read the newspaper, go to an early lunch, workout, take a coffee break and leave early and still meet the "substantially full time basis" and get absolutely no work done. I can see many ways for the employee to get the employer to do the termination by becoming a large pita. I am not sure they want that either.

If he gives them cause, I would think they would want to be able to have it forfeited rather than vested.

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OK, but my first question is, would your suggesting satisfy the "substantial risk of forfeiture" requirement. It seems you are saying yes.

And to your other point, I hear ya, believe me, but I could imagine a scenario where there would be enough trust that such a predicament is not a risk they feel the need to hedge against. And the Chariman's point (in this case) is as I had mentioned, he wants to provide the employee with an incentive to stay. If on the other hand it is the Organizations decision to let him go (for whatever reason) then he wants the employee to vest.

This is one of those situations where the clients want what they want. Why do they want what they want? Sometimes I don't want to know. He was quite clear on this point though.

Austin Powers, CPA, QPA, ERPA

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yes, I think that would satisfy the requirement, because the employee wouldn't control the circumstances of payout and could lose it through bad performance/behavior/etc. if he choses to go that way to get the employer to terminate him.

Right now, they want him to stay bad enough to give on that point. But I think if it just states "termination" that gives the employee control of when payment is made and there is not a real risk of forfeiture. He gets it no matter when or why he chooses to terminate. (And I will admit to getting cynical jaded over the years from an HR standpoint.)

I suppose you could use "employer-activated termination" and leave out cause altogether, but I don't think that properly protects the employer from a different perspective, but if they are okay with it and trust this employee then they only have themselves to blame if something goes bad and they have to pay out and don't want to at the time due to cause. I think that still leaves some risk of forfeiture if he doesn't stay as long as they want him to stay.

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Let's put it this way: You would not be alone if you concluded that involuntary termination by the employer without cause was a per se substantial risk of forfeiture. The IRS would not say that because the IRS always suspects skullduggery and the IRS knows what happened under section 83 with respect to noncompetition clauses. For example, if you were trying to shift a boatload of income from one year to the next and used involuntary termination as the risk of forfeiture, the IRS might argue that there is not a substantial risk within the time frame. But if the vesting date is five years out, I doubt that the IRS would blink an eye unless the person who controlled employment was the participant or a lackey.

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I didn't think this applied for some reason, I think I thought it was referencing a severance pay plan. I guess in a sense it is, but the point is, if you couple this with an additional requirement (i.e., future service) then that is only MORE substantial?

"For this purpose, if a service provider’s entitlement to the amount is conditioned on the

occurrence of the service provider’s involuntary separation from service without cause,

the right is subject to a substantial risk of forfeiture if the possibility of forfeiture is

substantial."

So to hr 4 me's point, if the employee can intentional screw things up and therefore get fired, because that is within his control, perhaps that is where the substantial risk of forfeiture loses water. I was wondering why they specified "without cause" but I think I have my answer... Agreed?

Austin Powers, CPA, QPA, ERPA

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I think so, but I am not sure exactly what you want agreement about. I agree that if the employee has control over not providing addtional service (including by bad acts or nonperformance - "cause" for termination), there is not substantial risk of forfeture. I edited my first post to clarify.

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