Unfunded Nonqualified Employer Retirement Plans
Parent Corporation May Guarantee Unfunded Retirement Benefits. – The mere contractual
guarantee of a retiree's benefits under an unfunded retirement plan by an employer’s parent
company will generally not accelerate the taxation of the benefits. (Ltr. Rul. 200450032.) See
Chapter 10 of the Guide for a discussion of deferrals of compensation under unfunded
retirement plans.
Early Payments Substantially Limited under Unfunded Retirement Plans. – The American
Jobs Creation Act of 2004 imposes new limitations on premature payments under unfunded
retirement plans (other than eligible exempt organization plans). The new limitations apply to
amounts deferred after 2004. The limitations also apply to amounts deferred before 2005 if your
employer materially modifies your plan after October 3, 2004.
When deferred payments may begin. – Under the new rules, an unfunded plan may provide for
payment of benefits only after the earliest of one or more of certain dates or events. Those dates
or events include (a) a date specified at deferral, (b) a participant's separation from service, (c) a
participant's disability, (d) a participant's death, (e) a change in ownership of the employer, or (f)
an unforeseeable emergency. Nevertheless, a participant may receive earlier payments to
satisfy divorce court orders, comply with federal conflict of interest rules, pay social security
taxes on deferrals of compensation, and certain other unusual events.
Some additional deferrals permitted. – An unfunded plan may allow a participant to make an
election to further delay payments or change their form. However, the election may not take
effect for at least 12 months. The election must also delay the payments for a period of at least
five additional years – unless the payments relate to the participant's death, disability, or
unforeseeable emergency. If the election involves a specified date for payment, the participant
must make the election at least 12 months before the specified date
Potentially harsh taxes, penalties, and interest. – Most employers will have modified plans to
conform to the new requirements. If not, though, or if a plan actually makes payments that do not
conform, a participant may become subject to substantial taxes, penalties, and interest (on the
tax deferred).
Certain property set aside for deferred payments. – A participant may also be liable for
substantial taxes, penalties, and interest if the participant's employer owns or transfers property
outside the United States that is set aside for payment of the participant's deferred
compensation – unless the property is in a foreign country where the participant earned the
compensation. The taxes, penalties, and interest may also apply if the plan restricts property to
payment of a participant's benefits upon future deterioration of the employer’s financial health –
or if property is actually so restricted.
For a more complete discussion of the new requirements, see Chapter 10 of the Guide.
(American Jobs Creation Act of 2004, Pub. L. No. 108-537; I.R.C. § 409A; Notice 2005-1, 2005-2
I.R.B. __.)
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Parent Corporation May Guarantee Unfunded Retirement Benefits. – The mere contractual
guarantee of a retiree's benefits under an unfunded retirement plan by an employer’s parent
company will generally not accelerate the taxation of the benefits. (Ltr. Rul. 200450032.) See
Chapter 10 of the Guide for a discussion of deferrals of compensation under unfunded
retirement plans.
Early Payments Substantially Limited under Unfunded Retirement Plans. – The American
Jobs Creation Act of 2004 imposes new limitations on premature payments under unfunded
retirement plans (other than eligible exempt organization plans). The new limitations apply to
amounts deferred after 2004. The limitations also apply to amounts deferred before 2005 if your
employer materially modifies your plan after October 3, 2004.
When deferred payments may begin. – Under the new rules, an unfunded plan may provide for
payment of benefits only after the earliest of one or more of certain dates or events. Those dates
or events include (a) a date specified at deferral, (b) a participant's separation from service, (c) a
participant's disability, (d) a participant's death, (e) a change in ownership of the employer, or (f)
an unforeseeable emergency. Nevertheless, a participant may receive earlier payments to
satisfy divorce court orders, comply with federal conflict of interest rules, pay social security
taxes on deferrals of compensation, and certain other unusual events.
Some additional deferrals permitted. – An unfunded plan may allow a participant to make an
election to further delay payments or change their form. However, the election may not take
effect for at least 12 months. The election must also delay the payments for a period of at least
five additional years – unless the payments relate to the participant's death, disability, or
unforeseeable emergency. If the election involves a specified date for payment, the participant
must make the election at least 12 months before the specified date
Potentially harsh taxes, penalties, and interest. – Most employers will have modified plans to
conform to the new requirements. If not, though, or if a plan actually makes payments that do not
conform, a participant may become subject to substantial taxes, penalties, and interest (on the
tax deferred).
Certain property set aside for deferred payments. – A participant may also be liable for
substantial taxes, penalties, and interest if the participant's employer owns or transfers property
outside the United States that is set aside for payment of the participant's deferred
compensation – unless the property is in a foreign country where the participant earned the
compensation. The taxes, penalties, and interest may also apply if the plan restricts property to
payment of a participant's benefits upon future deterioration of the employer’s financial health –
or if property is actually so restricted.
For a more complete discussion of the new requirements, see Chapter 10 of the Guide.
(American Jobs Creation Act of 2004, Pub. L. No. 108-537; I.R.C. § 409A; Notice 2005-1, 2005-2
I.R.B. __.)
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| Copyright © 2005-2008 by Vorris J. Blankenship All Rights Reserved |
The author intends that this website provide accurate and authoritative information on the subject matter
covered. However, the information provided on this website is not a substitute for the advice of an attorney,
accountant, or other professional; and the author is not offering legal, accounting, or other professional
advice. The material presented on this website is not intended for use, and may not be used, to avoid tax
penalties. If you need legal advice or other professional help, you should seek (from an independent
attorney, accountant, or other competent professional) advice based on your own particular circumstances.
covered. However, the information provided on this website is not a substitute for the advice of an attorney,
accountant, or other professional; and the author is not offering legal, accounting, or other professional
advice. The material presented on this website is not intended for use, and may not be used, to avoid tax
penalties. If you need legal advice or other professional help, you should seek (from an independent
attorney, accountant, or other competent professional) advice based on your own particular circumstances.
Key Tax Developments Affecting Retirees
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