Subject to 409A or No?

[HTO]

A bit of a brain teaser here.  A proposed arrangement would provide installment payments to an employee (or beneficiary) over a period up to 3 years only upon the employee's disability or death that occurs while employed and prior to a change in control of the employer.  The 409A regs provide that 409A does not apply to a plan to the extent that it provides disability pay or death benefits.  For this purpose, "disability pay" and "death benefits" are defined under the FICA regs.  

The FICA regs (31.3121(v)(2)-1(b)(3)(iv)) provide that payments under a plan in the event of disability are disability pay to the extent that the disability benefits payable under the plan exceed the lifetime benefits payable under the plan.  The regs define "lifetime benefits" as the present value of the benefits that could be payable to the employee under the plan during the employee's lifetime.  Because the only other benefits payable under the plan would be after the employee's death, it appears that the payments upon disability are "disability pay" not subject to 409A.

Similarly, the FICA regs provide that payments under a plan in the event of death are death benefits to the extent that the total benefits payable under the plan exceed the lifetime benefits payable under the plan.  Using the same definition of "lifetime benefits" as above, it appears that the disability payments (which could be payable during the employee's lifetime) would prevent the death payments from qualifying as "death benefits," thus subjecting the arrangement to 409A.  But this seems like an odd result, considering the similarity of the provisions for disability pay and death benefits, so is there an argument that benefits that constitute "disability pay" are disregarded in determining "lifetime benefits" so that the death payments constitute "death benefits" and the entire arrangement is not covered by 409A?  

 

[Artie M]

Not sure you will find much, if any, authority on this topic.  Under your facts, the two benefits appear to be under one arrangement so they appear to be under one "plan".  If they provide the same benefit, neither would provide "excess" benefits.  If the disability/death benefits pay differing amounts, theoretically there could be an "excess" benefit but that would only be helpful for a portion of the benefit.  As you have indicated, the determination of whether these benefits are excluded under 409A is determined under 3121 regs. 

My concern is that the 3121 regs do aggregate plans to a certain degree, though it uses a pre-409A definition of "plan", which takes into account the form, history and documents to determine what constitutes the "plan", but does not specifically use plan aggregation like 409A.   

Because of your statement of this being an odd result (which I do not disagree with), I presume there is no other agreement under which this employee could receive amounts that might insinuate the application of 409A (e.g., employment agreement with severance pay).  However, if there is another such agreement, the existence of that agreement could provide another fact that would preclude these as outside 409A (though I know some would not aggregate the separate agreement with this one, a conservative viewpoint may be to aggregate them).   I am asking this because you state this disability/death benefit will only be paid if prior to a change in control.  This sounds like this person could be covered under a change in control agreement/program.  If an individual agreement, those benefits might be aggregated with the disability/death benefit plan.  Also, CIC agreements also indicate other severance arrangements.  If this person is covered under a broad-based CIC/severance program(s), those programs probably wouldn't be aggregated with the death/disability plan but, if they are under an individual agreement, they might be.

I know this doesn't really help on your precise question but just some thoughts....     

[gc@chimentowebb.com]

Of course, this is just for 409A, not taxes.

My view:

(i) If the disability definition meets the standard definition for total disability, and if the payment do not substitute for another benefit that would have been payable (i.e. for termination) this taxable uninsured benefit is not subject to 409A. 

(ii) Same reasoning applies to the uninsured death-only benefit. Not subject to 409A but taxable. 

[HTO]

On 6/18/2025 at 11:02 AM, gc@chimentowebb.com said:

Of course, this is just for 409A, not taxes.

My view:

(i) If the disability definition meets the standard definition for total disability, and if the payment do not substitute for another benefit that would have been payable (i.e. for termination) this taxable uninsured benefit is not subject to 409A. 

(ii) Same reasoning applies to the uninsured death-only benefit. Not subject to 409A but taxable. 

Thank you.  For your answer to (ii), are you considering the payments to be made upon disability not to constitute "lifetime benefits"?