409A plan for former employees?

[mariemonroe]

Client sold assets of his business earlier this year.

As part of asset sale, all employees were terminated and were hired by asset purchaser.  

Client wants to use the installment payment he will receive in 2020 as part of the asset sale to provide a bonus to his former employees based on performance criteria (i.e. their services to their new employer).

I am having trouble wrapping my head around how Client can do this in the form of a nonqualified deferred comp plan. Any ideas?

 

 

 

[jpod]

Does he have some motivation for letting it be known that he intends to do this when he receives that money?  If not, why doesn't he just sit tight and keep the secret to himself and just write the checks when the time comes (unless he changes his mind!), subject of course to W-2 reporting and all required tax withholdings. 

If, however, he wants to bind his business entity, or his estate, to that obligation, then he can draw up some type of plan document, or an agreement with each employee, but he should be talking to a lawyer about this if you aren't his lawyer. 

In any event there should be no 409A issues or other "deferred compensation" concerns.

 

 

[XTitan]

Here's another way that could work.  Newco puts in a bonus plan for Oldco employees for 2020.  Client and Newco agree to the terms of the bonus, and any payments Newco makes to the Oldco employees reduces the 2020 installment amount paid to Client.  Newco gets to do all the tax reporting; who knows whether Client is still has the ability to deduct and remit taxes to appropriate authorities.  Still no 409A issues unless there is a desire to defer payment beyond 2020.

[Luke Bailey]

Mariemonroe, you have not provided a lot of facts, and I'm speaking off the top of my head, but I think what you're hung up on is something that 409A and its regs don't care much about, and that is the payor. With what you have described, the money will be compensation for services peformed by a "service provider," there is clearly a "service recipient," and if the compensation is deferred, you need to comply with 409A. The issue of why the seller is going to pay this, who issues the w-2 or 1099-MISC, who gets the deduction, what type of deduction, etc., are personal and/or corporate tax issues for the seller and acquired company.

[mariemonroe]

Thanks for your insights. I agree I am getting hung up on 409A when the real issue is how to structure to minimize tax effects to client.