Compliance March 28, 2006

409A Rules Not Expected Until Fall

March 28, 2006 (PLANSPONSOR.com) - After getting flooded with public comments regarding Section 409A rules on non-qualified deferred compensation plans, federal officials now caution not to expect final regulations until fall 2006.
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Stephen Tackney, attorney with the Executive Compensation Branch, Tax Exempt and Government Entities Division of the Internal Revenue Service (IRS), told a recentWashington, DC gathering that the IRS also needs extra time to promulgate final rules because of the complexity of the issues, BNA reported. The proposed regulations were issued September 29, 2005 (See  Rules/Regs: Second Chances ), and are expected to go into effect January 1, 2007 (REG-158080-04) (189 PBD, 9/30/05; 32 BPR 2109, 10/4/05).

After tax officials can complete the final version, the IRS will then develop guidance on how to figure out the most appropriate amounts to report on Form W-2,box 12 Codes Y and Z, according to Tackney.

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Section 409A provides, generally, that unless certain requirements are met, amounts deferred under a non-qualified deferred compensation plan are includible in gross income, Tackney said. To be includible, however, the amounts must not be subject to a substantial risk of forfeiture and not be previously included in gross income, he added.

According to the official, there are several arrangements not currently deemed to be includible, such as any tax-qualified plans, short-term deferrals, stock appreciation rights, or certain health reimbursement plans. Other non-qualified deferred arrangements, such as certain types of severance agreements, Section 457(f) plans, certain equity plans, phantom stock plans, and discounted option plans, are currently considered to be includible, he said.

The regulations now being developed include the statutory requirement that payments be made at a fixed date or under a fixed schedule, Tackney said. He added that such payments are also permissible upon the occurrence of specific events, such as employment termination, death, disability, change in ownership or control, or unforeseeable emergency.

Tackney told theWashington gathering that the proposed rules also provide guidance on what it means for a payment to be made when one of these events happens. When the time of payment is based upon the occurrence of one of these events, the plan also must designate an objectively determinable date or year following the event upon which the payment is to be made.

Employers also must make deferral elections in the year prior, Tackney said, adding that there no longer would be event-based payments under the new rules.

  

The official warned of three main consequences for employers for violating Section 409A:

  • immediate income inclusion, with all the subsequent tax and reporting responsibilities,
  • a 20% penalty, and
  • additional interest penalty that takes into consideration the time value of money.

The wage and information reporting rules will not affect Social Security or unemployment tax withholding or reporting, according to Frederick Wesner, employment tax attorney, Tax Exempt and Government Entities Division, Internal Revenue Service. Employers, however, must report the total amount of deferrals for the year under a non-qualified deferred compensation plan in box 12 of Form W-2, using Code Y, Wesner said.

Benefits March 27, 2006

Study: Employee Savings Habits will Delay Retirement

March 27, 2006 (PLANSPONSOR.com) - An Aon Consulting survey of 1,071 US employers found that 39% believe half or more of their workforce will not have enough savings to retire between the ages of 62 and 65.
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Employers in certain regions were even less optimistic, an Aon news release said. Forty-three percent in the Central region and 41% in the Southeast saying the majority of their employees will not retire at a traditional retirement age, based on savings habits.

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In addition, the study shows that 74% of organizations with 401(k), 403(b) and 457 plans say half or more of their employees contribute to these plans; however, only 19% of these companies believe their workers truly understand how to invest in plan assets. Sixty-three percent of respondents said their workforce has some understanding of defined contribution investment principles, but 18% believe their workers have little or very little knowledge on the topic, according to the release.

Few companies in the study are modifying their retirement plan designs to help employees with their challenges. Only 20% of companies are actively reviewing their retirement plans, while 80% are not considering near-term changes. Additionally, even though 76% of organizations believe retirement education is important, very important or absolutely critical, only 1% say financial or retirement planning information is communicated to employees on a regular basis.

Aon cites employee communications inefficiencies as a factor in the savings problem. “While most employees realize they should save more for retirement, the problem is they don’t know how much more,” said Bill Crawford, senior vice president with Aon Consulting, in the release. “Workers are left to interpret well-meaning, but nonspecific, retirement information, based on their own circumstances, which is a process that paralyzes many.”

One way companies are helping employees boost their retirement savings, though, is through employer match contributions. This survey found that 85% of organizations make contributions to employee 401(k), 403(b) and 457 plans to a certain level. Twenty-nine percent of companies offer a 100% match on employee contributions up to a certain level of compensation, while 7% provide a 75% match and 39% of employers provide a 50% match.

Other study findings included:

  • The most popular retirement plans employers offer include 401(k) (63%), defined benefit (23%) and 403(b) (15%).
  • Nearly 85% of organizations have 10 or more investment options in their defined contribution plans.
  • More than 85% of companies allow for loans through their defined contribution plans.
  • Nearly 90% of retirement plan participants use Web-based retirement planning tools.
  • Fifty-eight percent of employers offer retirement plan participants personalized advisor-based retirement planning tools.

Copies of the study are available by calling 800-438-6487.

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