Quasi Deferred Comp

[MGOAdmin]

I have a client that has a hard time keeping a certain employee type to stay with his company. He would like to have a 10 year cliff vesting schedule. This is obviously not allowed but the idea we came up with was as follows:

Assuming he wants to give $5,000 per year of service to these employees. In year 5, he would make a $25,000 profit sharing contribution for these employees. Any amount in excess of the annual additions limit will be given as a bonus. None of the employees are HCE's and the plan makes each employee their own allocation group.

1. Does anyone see any issues with the above arrangement?

2. Should he be accruing the expense on the books (I think yes)?

3. Is this a deferred comp arrangement? Are there any 409a issues?

Thanks

[jpod]

Sounds like a fairly elegant solution to me.  There shouldn't be any 409A issues because to the extent anything will be paid in cash rather than deposited to the plan I imagine it would be structured as a short term deferral not subject to 409A.  I cannot address financial accounting issues.

[XTitan]

Since this looks like a bonus arrangement, ERISA doesn't apply, so no issue there.  I would  caution against setting aside assets that would be guaranteed to pay benefits in the future as that could trigger immediate taxation under the economic benefit theory.  I agree with jpod; as long as the benefit is paid out with 2.5 months of vesting, then 409A doesn't apply.

Accounting-wise, I'd look to ASC 710 (where the old APB12 was codified).  In similar situations for top hat plans, I've had clients generally account for the liability ratably over the vesting period.

[Luke Bailey]

So just to be clear on what's being proposed, there would be a binding legal agreement that would say, if you're still here in 5 years (a) I will start a plan, and (b) I will contribute an amount to it. The plan will have a 5-year vesting schedule. It will not be in effect until the end of the 5-year period and will excluded pre-participation service (and there is no predecessor plan to block the exclusion of pre-participation service). If you are not here 5 years from now, you forfeit everything.

Is that it?

[ERISAAPPLE]

I would plan for the cash flow requirement.  The client can do that without an economic benefit to the employee.  Otherwise, what happens in year 5 if the company doesn't have the $25,000? That will be a mess and a really disgruntled employee on top.  One alternative is to tie the profit sharing requirement to some performance measure that is reasonably likely to ensure the company will have the cash flow needed to make the contribution.  

[John Feldt ERPA CPC QPA]

If this is attempted with a qualified plan you’d have to look at IRC 410(a). Regardless of having the allocation apply only to the NHCEs, if it’s based on 5 years of service, you may have violated 410(a) if the other NHCEs under 5 years get zero PS. Or is the plan established to only cover the one NHCE? 409A could only cover top hat employees - would they be in that group? Maybe the short-term deferral solution is the best option to fit their goals.

[card]

15 hours ago, Luke Bailey said:

So just to be clear on what's being proposed, there would be a binding legal agreement that would say, if you're still here in 5 years (a) I will start a plan, and (b) I will contribute an amount to it. The plan will have a 5-year vesting schedule. It will not be in effect until the end of the 5-year period and will excluded pre-participation service (and there is no predecessor plan to block the exclusion of pre-participation service). If you are not here 5 years from now, you forfeit everything.

If Luke's summary is correct, is there a potential qualification issue, or at least a vesting issue, because of the substantial and recurring contributions requirement?

[ERISAAPPLE]

11 hours ago, card said:

If Luke's summary is correct, is there a potential qualification issue, or at least a vesting issue, because of the substantial and recurring contributions requirement?

If it is a promise to establish a plan in the future, I don't see a qualification issue.  Once they establish the plan, they will have to meet all the tests/requirements.  

[card]

On 5/5/2018 at 7:50 PM, ERISAAPPLE said:

On 5/5/2018 at 8:49 AM, card said:

 

If it is a promise to establish a plan in the future, I don't see a qualification issue.  Once they establish the plan, they will have to meet all the tests/requirements.

My initial concern was if the profit-sharing plan is established with the intent of only ever having a single contribution (not clear from OP's post), is that plan qualified? And if there is no other contribution, is there a discontinuance (which may be moot since the employees would likely be vested long before the issue arose)?

Also, on re-reading Luke's post, I realized he (and perhaps the OP?) was talking about a 5 year cliff vesting schedule once the plan is adopted, and obviously that's not possible.
 

[Luke Bailey]

card, good point. I was not really thinking about the vesting schedule inside the plan. I think at this point MGOAdmin needs to clarify what the facts are. A lot of good problems were raised, though.