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Old 03-10-2012, 05:56 PM
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Question Non-qualified Deferred Compensation penalty

My company ended and distributed the funds from a Non-qualified Deferred Compensation plan before the end of the year, 2011. They withheld taxes. Now, doing my taxes, I am finding that I am being charged penalties for early withdrawal. The distribution was not my choice. The tax code 409a doesn't say anything about what to do if a company ends the program and distributes the funds. I shouldn't have to pay a penalty for this. Is there any form I need to fill out or any way to avoid penalty?



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Old 03-10-2012, 08:57 PM
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“The tax code 409a doesn't say anything about what to do if a company ends the program and distributes the funds. I shouldn't have to pay a penalty for this. Is there any form I need to fill out or any way to avoid penalty”---> Non-qualified deferred compensation plans are forbidden from being terminated except under limited circumstances.I guess you need to call the plan administrator and ask if there are any provisions defined in the plan's adoption agreement that allow for ER termination. Request a copy of the provisions.ALSO, you need to know the provisions to see if your company will be permitted to terminate the non-qualified deferred compensation plan. The three IRS-allowed provisions are a corporate termination, corporation change of control or the employer terminates for a more favorable incentive plan. ERs are not allowed to terminate a deferred compensation plan based exclusively on financial loss of the company.You may hire a labor attorney to review the provisions of termination and confirm you are entitled to terminate the plan. Yu can then call the deferred compensation plan administrator back and request termination paperwork. Fill out the paperwork and submit it. The administrator will send notification to the IRS. And you should pay all accrued deferred compensation according to the plan guidelines and payment allotments. Have payroll complete the required W-2 forms notifying the IRS of the additional income to EEs.Distributions under a nonqualified deferred compensation plan can only be payable upon one of six circumstances: the EE’s separation from service; the EE’s becoming disabled; theEE’s death; a fixed time or schedule specified under the plan; a change in ownership or effective control of the corporation, or a change in the ownership of a substantial portion of the assets of the corporation; or the occurrence of an unforeseeable emergency. There are three circumstances where a plan sponsor may terminate a plan: corporate dissolution or bankruptcy (as ordered by the bankruptcy court); upon a change in control;or purely as a matter of ER discretion.If termination occurs as a matter of plan sponsor discretion, distributions to plan participants may not begin for 12 months after plan termination and must be fully completed before the end of 24 months from plan termination.



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Old 03-10-2012, 09:41 PM
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More info...

Thank you! The company did subsequently file chapter 11 bankruptcy on or about February 1, 2012 and is going through the bankruptcy proceedings now. I'm sure they knew they were heading there back in November or December when the ended the plan and distributed the funds. Perhaps there was a "corporate change of control" or something that preceded the bankruptcy that makes the termination legitimate, but this was not announced publicly. I will see if I can speak to the plan administrator, or find out who that is... there has been some turnover... any other advise? Thanks again!!


Quote:
Originally Posted by Wnhough View Post
“The tax code 409a doesn't say anything about what to do if a company ends the program and distributes the funds. I shouldn't have to pay a penalty for this. Is there any form I need to fill out or any way to avoid penalty”---> Non-qualified deferred compensation plans are forbidden from being terminated except under limited circumstances.I guess you need to call the plan administrator and ask if there are any provisions defined in the plan's adoption agreement that allow for ER termination. Request a copy of the provisions.ALSO, you need to know the provisions to see if your company will be permitted to terminate the non-qualified deferred compensation plan. The three IRS-allowed provisions are a corporate termination, corporation change of control or the employer terminates for a more favorable incentive plan. ERs are not allowed to terminate a deferred compensation plan based exclusively on financial loss of the company.You may hire a labor attorney to review the provisions of termination and confirm you are entitled to terminate the plan. Yu can then call the deferred compensation plan administrator back and request termination paperwork. Fill out the paperwork and submit it. The administrator will send notification to the IRS. And you should pay all accrued deferred compensation according to the plan guidelines and payment allotments. Have payroll complete the required W-2 forms notifying the IRS of the additional income to EEs.Distributions under a nonqualified deferred compensation plan can only be payable upon one of six circumstances: the EE’s separation from service; the EE’s becoming disabled; theEE’s death; a fixed time or schedule specified under the plan; a change in ownership or effective control of the corporation, or a change in the ownership of a substantial portion of the assets of the corporation; or the occurrence of an unforeseeable emergency. There are three circumstances where a plan sponsor may terminate a plan: corporate dissolution or bankruptcy (as ordered by the bankruptcy court); upon a change in control;or purely as a matter of ER discretion.If termination occurs as a matter of plan sponsor discretion, distributions to plan participants may not begin for 12 months after plan termination and must be fully completed before the end of 24 months from plan termination.



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Old 03-10-2012, 09:57 PM
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The bankruptcy of the ER is a different situation. Since amounts deferred under a nonqualified plan remain subject to claims of the ER’s general creditors, secured creditors will first be paid in full, and plan participants are merely among the unsecured creditors waiting in line for any amounts that may be left over. Therefore, when the sponsor of a nonqualified plan goes into bankruptcy, the plan participants typically receive only pennies on each dollar owed. In some cases, they receive nothing. This rule applies to amounts voluntarily deferred by the EE out of his salary as well as any ER money that may have been contributed.Importantly, assets in a rabbi trust must remain subject to the claims of the ER’s creditors. Under the terms of a rabbi trust agreement, the ER is obligated to notify the trustee in the event of its insolvency, inability to pay debts as they become due, or pending bankruptcy.. If the ER becomes bankrupt or insolvent, the funds held in the trust are subject to the claims of the ER’s creditors. The ER cannot take income tax deductions for its contributions to the trust until the funds in the trust are actually distributed to the EE.



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Old 03-10-2012, 10:09 PM
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ERs can terminate a 409A plan without adverse tax consequences under 409A if the plan termination is not proximate to a downturn in the ER’s financial health; the ER terminated all other similar 409A plans; the ER doesn’t adopt another similar 409A plan for three years; payments under the plan are made no later than 24 months , after the ER takes the necessary steps to terminate the plan.



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