Exec is age 65 (NRA) but wishes to continue working and draw his SERP payment

[RayJJohnsonJr]

An Executive has reached his retirement age but he and his employer want him to continue employment or consult to the employer. The employee wants to receive both the SERP payment and continue to receive compensation for continuing to work and the employer is agreeable to that. One thing the employee wants is to continue 401k contributions. Is there any problem with the employer paying the 1st annual SERP payment and continuing to employ the executive?

[david rigby]

It seems this depends entirely on the terms of the SERP.

Just because he is 65, there is no requirement that the ER stop employing him. If so, then he can continue 401k contributions the same as any other Employee. But, since you say "executive", check the terms of the employment agreement, if any.

[Griswold]

It's unlikely that he'd be able to receive the SERP payment and remain at the same level of service.

[RayJJohnsonJr]

The corporations attorney says the executive could incur adverse tax consequences by taking the SERP payments and continuing to work for the corporation. Something about a potential excise tax that made no sense to me. The SERP agreement says there has to be a break in service for the executive to collect the SERP retirement payments but the business owner and the executive are both willing to strike the "break in service" requirement from the agreement. Other than the SERP there is no employment agreement.

Does anyone know if and why there could be adverse tax consequences to the executive if he collects the SERP payments and continues to work? Does anyone know where I might find some authority I can read on this subject?

Thanks to anyone who has input.

Ray

[jpod]

Section 409A of the Internal Revenue Code. (Although it is not an excise tax; 409A imposes additional income taxes if it is violated.)

[david rigby]

https://www.law.cornell.edu/uscode/text/26/409A

See 409A(a)(2)(A) Distributions, In general...

Note after subsection (v), the word "or"

This is modified by subsection (a)(2)(B(i), which deals with "Specified Employees".

[RayJJohnsonJr]

Thank you jpod and David. This clarifies the requirement that there be a separation from service. Why do you suppose this rule exists? Would not the IRS get more tax sooner if the SERP payments were not deferred? 409A frequently refers to "compensation deferred under the plan." This SERP did not involve the executive deferring compensation. It is fully funded by the employer. Would this have any effect on the outcome in so far as the additional 20% tax?

[XTitan]

Prior to 2005, non-qualified plans, which are nothing more than contractual agreements between employer and employee, have been around as long as there has been income tax. Plans were designed to comply with the constructive receipt rules, avoid economic benefit rules, relying on limited guidance, court cases, etc. ERISA exempted top hat plans from many (but not all) of it's provisions.

The American Jobs Creation Act codified the rules applying to non-qualified plans, partly in reaction to the how certain companies allowed their executives to receive accelerated non-qualified benefits in anticipation of bankruptcy.

The specified employee rule was designed to limit a key employee from terminating immediately in anticipation of a bankruptcy and still collect benefits. It helps prevent the need to clawback compensation from an individual who may have helped, how should I put this, "run the company into the ground."

The IRS would get very little tax sooner - if the employee is paying tax, then the employer is taxing a tax deduction at the same time.

An employer contribution is still considered deferred compensation as the employee has a legally binding right today to compensation to be paid in the future.

If you are having these questions about non-qualified plans, you should really seek expert counsel in the field.

[Belgarath]

And just FWIW, not in this case, but I have found that you can't necessarily rely on the term "SERP" to mean a 409 plan. I've found several situations where this term is used for a qualified plan - usually in the context of a new comparability plan where there was a takeover of a standard type PS or 401k plan with a pro-rata allocation, and the new salesman finds that it would pass testing with large amount to head honcho by converting to new comparability, so it is sold/marketed as a "SERP."

[RayJJohnsonJr]

Thank you XTitan and Belgarath for the valuable info. It is greatly appreciated.

[RayJJohnsonJr]

The business owner and the executive will not give up in their pursuit of achieving their objective. The objective is to pay the executive his 1st annual SERP instalment ($75,000) and continue to employ the executive for 2 years, and there be no adverse tax consequences. We know that cannot be done under 409A. The client has discussed this with several attorneys who cannot come up with a solution. Maybe they aren't imaginative enough.

What if the executive separated from service, collected his SERP, and was then retained by the employer as a consultant?

The SERP guarantees 10 annual benefit payments. What if the business owner and executive renegotiated the SERP to provide 8 payments of $75,000, commencing 2 years from now. Then the business retains the executive's employment for the next 2 years and pays him a salary that is $75,000 per year higher than what he would have been paid?

It seems there must be a creative solution that doesn't run afoul of 409A.

Anyone have any ideas?

[jpod]

They haven't come up with any solutions because there (probably) aren't any. Your two ideas probably won't work either (not going to bother citing chapter and verse here, just take my word for it). Anyway, we are all flying blind in this post because you haven't told us what the SERP says. Does it say he gets paid starting only when he has a separation from service or does he get paid starting at age 65 whether or not there is a separation from service?

[david rigby]

If we assume the attorney(s) have ruled out any possibility that this EE is not a "specified employee", the comment above from jpod is good advice.

If the ER elects to increase the ER's comp by $75K, that (probably) won't have any impact on the SERP itself, which leads to the possibility that the ER might have to pay it twice.

[jpod]

I was referring to the fact that paying him $75K more in salary and shortening the SERP period to 8 years would seem to be an obvious substitution and, therefore, an impermissible acceleration. I think it's pretty obvious this is not a public company because the OP refers to the "owner," so the CEO cannot be a specified employee.

[RayJJohnsonJr]

The SERP does require "separation from service as that term is defined in Treasury Regulation Section 1.409A-1(h)" to be considered retirement and therefore benefits to commence.

[Griswold]

You can amend the SERP to define the separation, but the service provider (i.e. the exec) would still have to go to under 50% of his/her former service level for the last three years. And that's really skirting the line.

[RayJJohnsonJr]

DanO, can you expand on that, I'm not following you?

[Griswold]

Sure--though I'm not sure it will get you to your goal. What you're looking for is a permissible distribution event under 409A. Separation from service is such an event. Under the regulations, an employee is presumed to have a separation if the level of bona fide services performed decreases to a level equal to 20 percent or less of the average level of services performed by the employee during the immediately preceding 36-month period. And there is also a presumption that a separation will not have occurred if the service provider continues at an annual rate that is 50 percent or more of that average. The regulations allow you to put into the SERP a definition of the separation. But the level of service would still need to be under 50%.Take a look at IRC 409A(a)(2)(A)(i) and Treas. Reg. 1.409A-1(h)(1)(i)-(ii).

[RayJJohnsonJr]

Thanks DanO' I'll see if that is a possibility.

[GMK]

Just out of curiosity (and since the serious issue may at last be resolved), do we have to call you Johnson?

[RayJJohnsonJr]

OH! You doesn't have to call me Johnson, now you can call me Ray, or you can call me J., ........... but you doesn't have to call me Johnson. Good ole SNL.

[jpod]

I am not so sure that the serious issue may be resolved. It is too late to change the definition of "separation of service" in the plan.

[RayJJohnsonJr]

I was afraid of that.

[XTitan]

From IMdb -

The Ace Trucking Company was one of the most innovative comedy troupes of the 1960s and 1970s. It consisted of four guys and one woman with George Memmoli, Michael Mislove, Bill Saluga, Patti Deutsch and Fred Willard. They were doing "sketch comedy" long before show such as Saturday Night Live (1975), "Friday" or MADtv (1995) ever came along.

The Ace Trucking Company appeared 35 times on "The Tonight Show with Johnny Carson" between April 1969 and May 1975. They also performed their comedy sketches as well as improvised routines on "The Mike Douglas Show", "The Dick Cavett Show", Don Kirschner's "The Midnight Special", and "This Is Tom Jones" (as series regulars). They also appeared in the motion picture, "The Harrad Experiment", and recorded an album of improvised sketches for RCA records.

One of those actors whom everyone has seen but no one knows his name, Bill Saluga, of the Ace Trucking Company comedy troupe, was seen all over television in the seventies and early eighties as an obnoxious little fellow named "Raymond J. Johnson, Jr." When addressed as "Johnson" though, he would launch into a tirade starting, "You doesn't has ta call me Johnson--you can call me RAY or you can call me JAY...."

[RayJJohnsonJr]

I'm not giving up on this easily. Suppose the executive continues to be employed (so no SERP payments can be made without adverse tax consequences) and the employer makes a loan to the executive approximately equal to what the 1st SERP payment would have been. A second loan is made at the beginning of year 2. After 2 years, the Executive separates from service. He receives SERP payment #1 to pay off loan #1 and SERP Payment #2 to pay of loan #2.