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5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.
Treasury Office of Benefits Tax Counsel Senior Attorney-Advisor Daniel L. Hogans and IRS Office of Division Counsel Tax Exempt and Government Entities Senior Attorney Cheryl E. Press agree that one of the more pressing issues for tax-exempt and government plans is how to resolve the apparent disconnect between the deferred payment rules under Code Sec. 457(f) and the deferred compensation rules under Code Sec. 409A. Speaking at an American Law Institute/American Bar Association (ALI-ABA) conference, "Retirement, Deferred Compensation, and Welfare Plans of Tax-Exempt and Governmental Employers," held in Washington, D.C., on September 8, 2006, Hogans and Press also agreed that guidance is necessary to resolve many of the inconsistencies. The IRS is moving forward with final 409A rules, Hogans said, but indicated that the effective date of those rules will likely be delayed.
If Code Sec. 457 plan eligibility requirements are not met, compensation deferred under the plan is taxable to the employee in the first year there is no substantial risk of forfeiture. In addition, the plans will be subject to the rules of Code Sec. 409A. "Those sections each take a substantively different approach to deferred compensation," Hogans observed. For example, under Code Sec. 457(f), the substantial risk of forfeiture rule is fairly strict to the extent that something treated as nonvested may be treated as vested under Code Sec. 409A. In contrast, while a severance agreement is not subject to Code Sec. 457(f), it is presumptively deferred compensation under Code Sec. 409A.
Hogans suggested that government plans and exempt plans test separately for Code Sec. 457(f) and Code Sec. 409A compliance. "They should do so sequentially rather than simultaneously," he emphasized. Press agreed, although she suggested that, in connection with the substantial risk of forfeiture rule, "if you follow 409A, you probably will meet the 457(f) requirements."
Press reported that those involved in the Code Sec. 457(f) regulation project now underway have tried, whenever possible, to provide consistency with regard to definitions used in both Code Sec. 457(f) and Code Sec. 409A. However, she also made it clear that, when consistency is not possible, practitioners should remember that it was Congress, not the IRS, that subjected government and exempt entities that offer deferred compensation to their employees to both layers (i.e., Code Sec. 457(f) and Code Sec. 409A).
Press reported that the Code Sec. 457(f) regulations project team focused on a number of difficult topics in developing their guidance. That list includes:
Covenants not to compete and Code Sec. 83's presumption that such arrangements do not rise to the level of a substantial risk of forfeiture;
Consulting service agreements, especially when following full-time employment;
Goal-oriented conditions related to employment;
Salary-reduction agreements;
Rolling risks of forfeiture and their connection to legitimate business purposes;
Unforeseeable emergencies;
Defining a permissive service credit under Code Sec. 415(n);
Defining a government plan for purposes of Code Sec. 414(d);
Variations on sick and vacation plan deferrals;
Variations on severance pay plans; and
Transition rules.
Specifically on the matter of transition rules under the soon-to-be-released Code Sec. 457(f) regulations, Press reported that the IRS is inclined not to give employers a free pass on following all the rules prior to release of the rules. A pass will be allowed "only in the gray areas," stated Press, who also reported that the IRS has an audit initiative on Code Sec. 457(f) plans currently underway.
The January 1, 2007 effective date set in the proposed 409A regulations "looks increasingly unworkable at this point," Hogans reported. While work on the final regulations is moving forward and may be completed before that date, he observed that the final regulations will contain different effective dates from the proposed regulations so as to provide time for taxpayers to digest the new rules, consider alternatives and draft documents. "Expect guidance on that [extension], hopefully sooner than later," Hogans said.
In connection with taxpayers working with what guidance they now have available under Code Sec. 409A, Hogans said that Notice 2005-1 (CCH Pension Plan Guide ¶17,130K ), which contains the operative guidance for good-faith compliance with Code Sec. 409A continues to apply. In addition, he reassured practitioners that following the details set forth in the September 2005 proposed regulations will be deemed to be "good-faith compliance" until final rules are issued.
For more information on this and related topics, consult the CCH Pension Plan Guide.
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